What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-09-06 compared with 2024-03-08 · 298 added, 324 removed, 169 unchanged (79% of the section changed)

2 unchanged sentences

Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30.

The nine months ended January 28, 2024, and January 29, 2023, both represent 39-week periods.

The three months ended July 28, 2024, and July 30, 2023, both represent 13-week periods.

Our operations are classified into two business segments:

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The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers.

Currently, we have mattress fabric operations located in Stokesdale, NC, Quebec, Canada, and Ouanaminthe, Haiti.

Currently, we have mattress fabric manufacturing operations located in Stokesdale, North Carolina, and Quebec, Canada.

We also have a mattress cover operation located in Ouanaminthe, Haiti.

On April 29, 2024 (the 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;

and (4) consolidate the company's sewn mattress cover operation located in Ouanaminthe, Haiti, from two leased facilities into one building and reduce other operating expenses at this location.

See Note 9 of the consolidated financial statements for further details regarding our restructuring activities.

Upholstery Fabrics

The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers.

Currently, we have upholstery fabric operations located in Shanghai, China, and Burlington, NC.

During the third quarter of fiscal 2022, we commenced operation of a new leased facility located in Ouanaminthe, Haiti, dedicated to the production of cut and sewn upholstery kits.

However, due to a decline in demand, we (i) terminated the agreement to lease this new facility during the third quarter of fiscal 2023, (ii) relocated a scaled-down upholstery cut and sew operation into our existing mattress cover facility located in Ouanaminthe, Haiti, during the fourth quarter of fiscal 2023, and (iii) thereafter discontinued the production of cut and sewn upholstery kits in Haiti during the latter part of the first quarter of fiscal 2024.

(See Note 9 to the consolidated financial statements for further details.)

Additionally, Read Window Products, LLC (“Read”), a wholly-owned subsidiary with operations located in Knoxville, TN, provides window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services for Read’s products, to customers in the hospitality and commercial industries.

The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential, commercial, and hospitality furniture manufacturers.

We have upholstery fabric operations located in Shanghai, China, and Burlington, North Carolina.

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.

Additionally, Read Window Products, LLC (“Read”), a wholly-owned subsidiary with operations located in Knoxville, Tennessee, and Burlington, North Carolina (within an existing upholstery fabrics facility), 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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Selling, general, and administrative expenses

Restructuring (credit) expense

Loss from operations

Operating margin

Loss before income taxes

Income tax expense

Nine Months Ended

(dollars in thousands)

Selling, general, and administrative expenses

Restructuring expense

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Income tax expense

Overall, our net sales for the third quarter of fiscal 2024 increased by 15% compared with the same period a year ago, with mattress fabrics sales increasing 21.6% and upholstery fabrics sales increasing 9.2%.

Our net sales for the first nine months of fiscal 2024 increased by 1.3% compared with the same period a year ago, with mattress fabrics sales increasing 12.9% and upholstery fabrics sales decreasing 8.6%.

The increase in net sales in our mattress fabrics segment for both the third quarter and the first nine months of fiscal 2024 was primarily driven by new fabric and sewn cover placements that are priced in line with current costs, and, to a lesser extent, SKU rationalization and the re-pricing of some underperforming SKUs to reflect current costs, resulting in higher average selling prices overall.

The increase in net sales for our upholstery fabrics segment for the third quarter of fiscal 2024 was driven by the timing of the Chinese New Year holiday (which falls primarily in the fourth quarter of fiscal 2024, as compared to the third quarter of fiscal 2023), as well as improved residential home furnishing sales during the period.

The decrease in net sales for our upholstery fabrics segment for the first nine months of fiscal 2024 reflects reduced demand for our residential upholstery fabrics products during the first half of the year, driven by a slowdown in new retail business in the residential home furnishings industry during this period.

Overall, our consolidated net sales for the first quarter of fiscal 2025 were flat compared with the same period a year ago, with mattress fabrics sales decreasing 3.9% and upholstery fabrics sales increasing 3.7%.

The decrease in net sales for our mattress fabrics segment, as compared to the prior-year period, reflects reduced demand as a result of weakness in the domestic mattress industry.

The increase in net sales for our upholstery fabrics segment reflects improved demand for our residential and hospitality/commercial upholstery fabric products as compared to the prior-year period.

See the Segment Analysis section below for further details.

Loss Before Income Taxes

Overall, our loss before income taxes for the third quarter of fiscal 2024 was $(2.2) million, compared with loss before income taxes of $(8.7) million for the prior-year period, while our loss before income taxes for the first nine months of fiscal 2024 was $(6.7) million, compared with loss before income taxes of $(24.5) for the prior-year period.

Operating performance for the third quarter of fiscal 2024, as compared to the prior-year period, was positively affected by higher sales volume and a more profitable mix of sales for both the mattress fabrics and upholstery fabrics segment;

a more favorable foreign exchange rate associated with our upholstery fabrics operation in China;

and fixed cost savings in the upholstery fabrics segment.

These factors were partially offset by higher SG&A expense during the period, as well as production inefficiencies relating to the start up of certain new product launches in the mattress fabrics segment.

Notably, operating performance for the third quarter of fiscal 2023 was negatively affected by restructuring and related charges associated with our upholstery fabrics segment.

Operating performance for the first nine months of fiscal 2024 was positively affected by the same factors that affected the third quarter, as well as better inventory management.

These factors were partially offset by higher SG&A expense over the nine-month period;

lower residential upholstery fabrics sales during the first six months of fiscal 2024;

and production inefficiencies that negatively affected our mattress fabrics segment during the third quarter of fiscal 2024.

Notably, operating performance for the first nine months of fiscal 2023 was negatively affected by inventory impairment charges and inventory closeout sales for our mattress fabrics segment;

higher than normal markdowns of inventory for our upholstery fabrics segment;

and restructuring and related charges associated with our upholstery fabrics segment.

Overall, our loss before income taxes for the first quarter of fiscal 2025 was $(7.0) million, compared with loss before income taxes of $(2.6) million for the prior-year period.

Operating performance for the first quarter of fiscal 2025, as compared to the prior-year period, was negatively affected by manufacturing inefficiencies primarily related to the significant restructuring activity underway in the mattress fabrics segment, along with $2.7 million in restructuring and restructuring-related charges during the period (compared with $517,000 in restructuring and restructuring-related charges during the prior-year period).

These factors were partially offset by improved operating performance from our upholstery fabrics segment, as well as lower SG&A expenses.

See the Segment Analysis section below for further details.

We recorded income tax expense of $2.2 million, or (33.4%) of loss before income taxes, for the nine-month period ending January 28, 2024, compared with income tax expense of $2.3 million, or (9.5%) of loss before income taxes, for the nine-month period ending January 29, 2023.

Our consolidated effective income tax rates during the first nine months of fiscal 2024 and the first nine months of fiscal 2023 were both adversely affected by the mix of earnings between our U.S.

operations and foreign subsidiaries, as our taxable income stems from our China operations during fiscal 2024 and from our China and Canada operations during fiscal 2023, which have higher income tax rates than the U.S.

In addition, during both the first nine months of fiscal 2024 and fiscal 2023, we incurred pre-tax losses associated with our U.S.

We recorded income tax expense of $240,000, or (3.4%) of loss before income taxes, for the three-month period ended July 28, 2024, compared with income tax expense of $701,000, or (26.5%) of loss before income taxes, for the three-month period ended July 30, 2023.

Our consolidated effective income tax rates during the first quarter of fiscal 2025 and fiscal 2024 were both adversely affected by the mix of earnings between our U.S.

operations and foreign subsidiaries, as our taxable income stems mostly from our operations located in China, which has a higher income tax rate than the U.S.

In addition, during the first quarters of fiscal 2025 and fiscal 2024, we incurred pre-tax losses associated with our U.S.

operations, for which an income tax benefit was not recorded due to the full valuation allowance applied against our U.S.

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The income tax charge associated with the full valuation allowance applied against our U.S.

net deferred income tax assets was lower during the first nine months of fiscal 2024 compared with the first nine months of fiscal 2023, as our $(11.3) million U.S.

pre-tax loss incurred during the first nine months of fiscal 2024 was significantly lower than the $(28.8) million U.S.

pre-tax loss incurred during the first nine months of fiscal 2023.

During the first nine months of fiscal 2024, we incurred a lower consolidated pre-tax loss totaling $(6.7) million, compared with $(24.5) million during the first nine months of fiscal 2023.

net deferred income tax assets was higher during the first quarter of fiscal 2025 as compared with the first quarter of fiscal 2024, as our $(7.0) million U.S.

pre-tax loss incurred during the first quarter of fiscal 2025 was significantly greater than the $(3.3) million U.S.

pre-tax loss incurred during the first quarter of fiscal 2024.

During the first quarter of fiscal 2025, we incurred a greater consolidated pre-tax loss totaling $(7.0) million, compared with $(2.6) million during the first quarter of fiscal 2024.

As a result, the principal differences between income tax expense at the U.S.

federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during the first nine months of fiscal 2024, as compared with the first nine months of fiscal 2023.

federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during the first quarter of fiscal 2024, as compared with the first quarter of fiscal 2025.

Refer to Note 14 of the consolidated financial statements for further details regarding our provision for income taxes.

As of January 28, 2024, our cash and cash equivalents (collectively, “cash”) totaled $12.6 million, a decrease of $8.4 million compared with cash of $21.0 million as of April 30, 2023.

This decrease was mostly due to net cash used in operating activities totaling $(6.0) million and capital expenditures mostly related to our mattress fabrics segment totaling $(3.2) million, partially offset by proceeds from the sale of rabbi trust investments totaling $1.2 million to fund withdrawals from our deferred compensation plan for certain retired employees (see offsetting decrease to the decrease in deferred compensation liability in item (iii) of the below paragraph).

Our net cash used in operating activities was $(6.0) million during the first nine months of fiscal 2024, a decrease of $10.6 million compared with net cash provided by operating activities of $4.6 million during the first nine months of fiscal 2023.

This trend primarily reflects (i) a significant decrease in inventory during the first nine months of fiscal 2023 due to improved alignment of inventory purchases with customer demand trends, promotional programs to reduce aged raw materials and finished goods inventory, and a significant decline in net sales (27.1%) during the period, which did not recur during the first nine months of fiscal 2024;

(ii) annual incentive payments made during the first quarter of fiscal 2024, which did not occur during the first quarter of fiscal 2023;

(iii) payments to certain retired employees totaling $1.2 million for withdrawals from our deferred compensation plan during the first nine months of fiscal 2024;

partially offset by (iv) an increase in cash earnings during the first nine months of fiscal 2024 compared with the first nine months of fiscal 2023.

As of January 28, 2024, there were no outstanding borrowings under our lines of credit.

As of July 28, 2024, our cash and cash equivalents (collectively, “cash”) totaled $13.5 million, an increase of $3.5 million compared with cash of $10.0 million as of April 28, 2024.

This increase was mostly due to $4.0 million in cash proceeds from borrowings on our line of credit associated with our operations located in China, partially offset by capital expenditures totaling $501,000.

Our net cash used in operating activities was $206,000 during the first quarter of fiscal 2025, a decrease of $4.2 million compared with net cash used in operating activities of $4.4 million during the first quarter of fiscal 2024.

This trend mostly reflects (i) a decrease in accounts payable and accrued expenses during the first quarter of fiscal 2024 due to a decline in net sales for the first quarter of fiscal 2024 as compared with the first quarter of fiscal 2023, which decline did not recur during the first quarter of fiscal 2025 as compared with the first quarter of fiscal 2024;

(ii) a decrease in inventory due to improved inventory management for both the mattress fabrics and upholstery fabrics segments and due to the gradual wind down of operations at the company's manufacturing facility in Quebec, Canada, as described below in the section below titled “—Segment Analysis — Mattress Fabrics Segment — Restructuring Activities” of this Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ;

and (iii) a decrease in accounts receivable during the first quarter of fiscal 2024 due to a decline in net sales during the first quarter of fiscal 2024 as compared with the first quarter of fiscal 2023, which decline did not recur during the first quarter of fiscal 2025 as compared with the first quarter of fiscal 2024.

As of July 28, 2024, we had outstanding borrowings totaling $4.0 million under a line of credit agreement associated with our operations located in China.

Segment Analysis

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(dollars in thousands)

Gross profit (loss)

Gross (loss) profit

Gross profit margin

Selling, general, and administrative expenses

Loss income from operations

Operating margin

Nine Months Ended

(dollars in thousands)

Gross profit (loss)

Selling, general, and administrative expenses

Restructuring expense

Loss from operations

Operating margin

Mattress fabrics sales increased 21.6% in the third quarter of fiscal 2024 compared to the prior-year period.

Mattress fabrics sales increased 12.9% in the first nine months of fiscal 2024 compared to the first nine months of fiscal 2023.

The increase in net sales in our mattress fabrics segment for both the third quarter and the first nine months of fiscal 2024 was primarily driven by new fabric and sewn cover placements that are priced in line with current raw material and operational costs, and, to a lesser extent, SKU rationalization and the re-pricing of some underperforming SKUs to reflect current costs, resulting in higher average selling prices as compared to historical average selling prices.

During the third quarter, we maintained our focus on executing our product-driven strategy with an ongoing emphasis on innovation, design creativity, and customer relationships.

The strength and flexibility of our global manufacturing and sourcing operations in the U.S., Canada, Haiti, Asia, and Turkey continued to support the evolving needs of our mattress fabrics and cover customers during the period.

We also continued to implement improvement initiatives to support future profitable sales growth and enhance operating efficiencies.

Looking ahead, we are diligently focused on winning new placements to drive revenue and increase margins.

We are optimistic about the mid-to-long term growth potential for our business and believe our market position is strong.

However, the industry demand backdrop has deteriorated further than expected during the first few weeks of the fourth quarter.

We expect current macro-economic conditions will continue to affect consumer spending trends for some time, resulting in ongoing industry softness that could affect near-term sales results.

In the face of these macro headwinds, we are working to manage the aspects of our business we can control.

We believe we will mitigate demand pressures to some extent by the continued rollout of new programs priced in line with current costs, along with opportunities to make additional gains with customers.

However, greater macro-industry and end-consumer support will be needed to drive recovery in the mattress industry and support our future sales growth.

Additionally, the potential ongoing geopolitical disruptions related to wars in Ukraine and the Middle East, as well as possible economic and health effects from additional surges in the coronavirus, remain unknown and depend on factors beyond our knowledge or control.

Mattress fabrics sales decreased 3.9% during the first quarter of fiscal 2025 compared to the prior-year period.

This decrease in net sales for our mattress fabrics segment reflects reduced demand due to weakness in the domestic mattress industry, driven by a challenging macroeconomic environment that has affected consumer discretionary spending and housing markets.

Based on demand trends and ongoing macroeconomic challenges, we took aggressive action during the first quarter of fiscal 2025 to bring our manufacturing costs and capacity in line with current and expected demand.

We announced a major restructuring plan primarily focused on the mattress fabrics segment early in the quarter, and we are making steady progress on the execution of this restructuring plan, which is expected to be mostly completed by the end of this calendar year.

See “—Restructuring Activities” below for further details.

Looking ahead, we are diligently focused on winning new placements to increase revenue and margins.

However, with no ascertainable catalysts that might be expected to drive recovery in the near term, we expect the current macroeconomic environment will continue to pressure consumer spending and housing market trends (and our net sales) for some time.

In the face of these macro headwinds, we are working to manage the aspects of our business we can control, including the execution of our restructuring plan.

We believe the strategic actions we are taking will position us for profitable growth opportunities, but greater macro-industry and end-consumer support will be needed to drive recovery in the mattress industry and support our future sales growth.

Additionally, the potential ongoing geopolitical disruptions related to wars in Ukraine and the Middle East remain unknown and depend on factors beyond our knowledge or control.

These situations could cause disruption to global markets that could adversely affect our operations and financial performance.

Gross Profit, Selling, General & Administrative Expenses, and Loss from Operations

The decrease in this segment’s operating loss during the third quarter of fiscal 2024, as compared to the prior-year period, was primarily due to higher sales of products with better pricing and margins, as well as a more favorable product mix.

These factors were partially offset by production inefficiencies mostly relating to the start up of certain new product launches, as well as higher SG&A expense.

The decrease in operating loss during the first nine months of fiscal 2024, as compared to the prior-year period (which was negatively affected by certain inventory impairment charges and losses from inventory close out sales), was primarily due to the same factors that positively affected the third quarter, along with better inventory management.

These factors were partially offset

by higher SG&A expense during the period, as well as the production inefficiencies relating to the start up of certain new product launches that negatively affected the third quarter.

Higher SG&A expense during both the third quarter and the first nine months of fiscal 2024, as compared to the prior-year periods, was due mostly to an increase in provision for bad debts (reflecting current unfavorable macro-economic conditions relating to bedding products), an increase in sampling expense driven by new product roll outs;

and an increase in personnel;

partially offset by lower compensation expense.

We expect the ongoing (and further deteriorating) industry softness affecting sales volumes will continue to affect profitability for this segment, although we believe these headwinds will be mitigated to some extent by our ongoing efforts to improve operational efficiencies and control internal costs, as well as our continued roll out of new products priced in line with current costs.

Additionally, the internal inefficiencies relating to the start up and production of certain new products that negatively affected this segment's operating performance during the third quarter of fiscal 2024 are also expected to affect operating performance during the fourth quarter.

Looking ahead, with the uncertainty of consumer demand in the near term, we are evaluating strategic actions to adjust and right-size our global platform to align with current demand levels, while still supporting our valued customers.

We will also consider additional reasonable pricing actions as competitive conditions permit to further mitigate and manage inflation.

Loss from operations was $3.5 million for the first quarter of fiscal 2025, compared to loss from operations of $1.4 million for the first quarter of fiscal 2024.

Operating performance for the first quarter of fiscal 2025, as compared to the prior-year period, was pressured by lower sales volumes and manufacturing inefficiencies primarily related to our significant restructuring initiatives to gradually wind down our Canadian operation and move certain knitting equipment to our Stokesdale, North Carolina, manufacturing facility.

These factors were partially offset by lower SG&A expense for the quarter.

We expect manufacturing inefficiencies related our restructuring initiatives, as well as ongoing industry softness affecting sales volumes, will affect profitability through at least the second quarter of fiscal 2025, as we work to implement our restructuring plan to align capacity with current and expected demand.

However, we expect these restructuring initiatives, once fully implemented, will enable the mattress fabrics segment to grow more efficiently and profitably with a lower level of fixed costs, even at currently depressed sales levels.

See “—Restructuring Activities” below for further details.

Importantly, these strategic steps do not limit our ability to grow the mattress fabrics business, but instead allow us to better optimize our global mix of manufacturing capabilities and long-term sourcing partners.

We will also consider further adjustments to right-size and restructure our operations as necessary to align with current demand levels, as well as additional reasonable pricing actions as competitive conditions permit to further mitigate and manage inflation.

Restructuring Activities

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;

(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 into one facility located in Ouanaminthe, Haiti, and reduce other operating expenses at this location.

We expect the gradual discontinuance of operations and the closure of the facility located in Quebec, Canada, will be completed by December 31, 2024.

The consolidation activity associated with the sewn mattress cover operation located in Haiti was completed during the first quarter of fiscal 2025.

These actions are expected to result in restructuring and restructuring related charges of approximately $5.0 million during fiscal 2025, of which approximately $2.9 million is expected to be cash expenditures.

The $5.0 million of estimated restructuring and restructuring related charges associated with our mattress fabrics segment represents (i) other associated costs of $1.7 million mostly related to relocating equipment from our facility in Quebec, Canada, to our facility in Stokesdale, North Carolina;

(ii) additional depreciation expense of $1.4 million related to the shortening of useful lives of equipment resulting from the gradual discontinuation of our Canadian operations;

(iii) employee termination benefits of $1.2 million;

(iv) lease termination costs of $531,000;

(v) writedowns and other inventory related adjustments of $116,000;

and (vi) impairment charges and losses on the disposal of equipment totaling $95,000.

These restructuring and restructuring related 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.

Based on changes in business and current industry economic conditions, it is possible that the above estimates provided by management to determine restructuring and restructuring related charges incurred during fiscal 2025, 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.

The following summarizes the restructuring and restructuring related charges for the mattress fabrics segment for the three-month period ending July 28, 2024:

Three Months Ended

(dollars in thousands)

July 28, 2024

Additional depreciation expense for shortened useful lives of equipment

Employee termination benefits

Lease termination costs

Other Associated Costs

Loss on disposal and markdowns of inventory

Impairment and loss on disposal of equipment

Restructuring expense and restructuring related charges (1)

(1) Of the total $2.6 million restructuring and restructuring related charges, $2.5 million and $116,000 were classified within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month period ending July 28, 2024.

Refer to Note 9 of the the consolidated financial statements for further details.

Segment assets

Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.

Segment assets consist of accounts receivable, inventory, property, plant, and equipment, right of use assets, and assets held for sale:

(dollars in thousands)

January 28, 2024

January 29, 2023

July 28, 2024

July 30, 2023

April 28, 2024

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Right of use assets

Assets held for sale

Refer to Note 13 of the consolidated financial statements for disclosures regarding determination of our segment assets.

Accounts Receivable

As of January 28, 2024, accounts receivable increased by $3.1 million, or 37.9%, compared with January 29, 2023.

This increase reflects the increase in net sales during the third quarter of fiscal 2024 compared with fiscal 2023, as described in the Net Sales section above.

In addition, we experienced slower cash collections as customers did not take advantage of cash discounts as much during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023, and more customers elected to source our products from China, (where we have longer payment terms) as opposed to the U.S.

This led to an increase in days' sales outstanding to 35 days for the third quarter of fiscal 2024, as compared with 31 days for the third quarter of fiscal 2023.

As of January 28, 2024, accounts receivable decreased by $933,000, or 7.5%, compared with April 30, 2023.

This decrease primarily reflects faster cash collections, as we had a mix of higher sales to customers with longer credit terms during the fourth quarter of fiscal 2023, as compared with the third quarter of fiscal 2024.

As a result, days’ sales outstanding decreased to 35 days during the third quarter of fiscal 2024, a decrease from 37 days during the fourth quarter of fiscal 2023.

As of January 28, 2024, inventory decreased by $832,000, or 2.9%, compared with January 29, 2023.

Although net sales increased by 21.6% during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023, inventory modestly decreased during the third quarter of fiscal 2024, as compared with the prior-year period, due to improved raw materials inventory management in relation to current customer demand trends and promotional programs to reduce aged raw materials and finished goods.

As of January 28, 2024, inventory increased by $2.3 million, or 8.8%, compared with April 30, 2023.

This trend primarily reflects lower than anticipated demands trends during the third quarter of fiscal 2024, compared with the fourth quarter of fiscal 2024.

Net sales for the third quarter of fiscal 2024 were $30.0 million, a decrease of 2.2%, compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.

Inventory turns were 4.0 for the third quarter of fiscal 2024, compared with 3.5 for the third quarter of fiscal 2023 and 4.4 for the fourth quarter of fiscal 2023.

As of July 28, 2024, accounts receivable decreased by $964,000, or 8.7%, compared with July 30, 2023.

This reflects the decrease in net sales noted above and faster cash collections from a significant customer who utilized more cash discounts during the first quarter of fiscal 2025, as compared with the first quarter of fiscal 2024.

Accordingly, days’ sales outstanding decreased to 33 days for the first quarter of fiscal 2025, as compared to 34 days for the first quarter of fiscal 2024.

As of July 28, 2024, accounts receivable remained flat compared with April 28, 2024.

This primarily reflects an increase in net sales for the first quarter of fiscal 2025, as compared to the fourth quarter of fiscal 2024, offset by faster cash collections, as we experienced faster cash collections from a significant customer who utilized more cash discounts during the first quarter of fiscal 2025, as compared with the first quarter of fiscal 2024.

Net sales for the first quarter of fiscal 2025 were $28.1 million, an increase of 9.0% compared with net sales of $25.8 million during the fourth quarter of fiscal 2024.

As a result, days’ sales outstanding decreased to 33 days for the first quarter of fiscal 2025, as compared to 35 days for the fourth quarter of fiscal 2024.

As of July 28, 2024, inventory modestly increased by $699,000, or 2.8%, compared with July 30, 2023.

In connection with the restructuring activity described above in “—Restructuring Activities,” this trend represents an increase in finished goods inventory to accommodate customers while the weaving operation is transitioned to a strategic sourcing model and knitting and finishing capacity is relocated from the manufacturing facility in Quebec, Canada, to our facility in Stokesdale, North Carolina.

This increase in finished goods inventory was partially offset by lower raw material purchases related to the gradual discontinuation of operations of the company's manufacturing facility located in Quebec, Canada, as described above in “—Restructuring Activities,” and also by the decrease in net sales described above.

As of July 28, 2024, inventory decreased by $2.4 million, or 8.6%, compared with April 28, 2024.

This decrease stems from the gradual discontinuation of operations of the company's manufacturing facility located in Quebec, Canada, as described above in

“—Restructuring Activities,” and from improved inventory management during the first quarter of fiscal 2025 as compared with the fourth quarter of fiscal 2024, taking into account current and expected future demand trends.

Inventory turns were 4.3 for the first quarter of fiscal 2025, as compared with 4.4 for the first quarter of fiscal 2024 and 3.6 for the fourth quarter of fiscal 2024.

Property, Plant, & Equipment

As of January 28, 2024, property, plant, and equipment has steadily decreased compared to January 29, 2023, and April 30, 2023, due to reduced capital spending stemming from the current and expected unfavorable macro-economic conditions and our strategic focus on limited capital projects that will increase efficiencies and improve the quality of our products.

The $32.3 million as of January 28, 2024, represents property, plant, and equipment of $21.9 million, $9.8 million, and $600,000 located in the U.S., Canada, and Haiti, respectively.

The $34.7 million as of January 29, 2023, represents property, plant, and equipment of $23.1 million, $10.9 million, and $651,000 located in the U.S., Canada, and Haiti, respectively.

During fiscal 2024 and continuing through the first quarter of fiscal 2025, property, plant, and equipment has steadily decreased due to reduced capital spending stemming from current unfavorable macro-economic conditions within the home furnishings and bedding industries, as well as the actions taken as described above in “—Restructuring Activities.”

The $28.8 million as of July 28, 2024, represents property, plant, and equipment of $20.9 million, $7.4 million, and $511,000 located in the U.S., Canada, and Haiti, respectively.

The $32.8 million as of July 30, 2023, represents property, plant, and equipment of $22.1 million, $10.1 million, and $594,000 located in the U.S., Canada, and Haiti, respectively.

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.

Right of Use Assets

As of January 28, 2024, right of use assets have decreased due to rent expense incurred over the terms of existing lease agreements.

The $1.8 million as of January 28, 2024, represents right of use assets of $1.2 million and $604,000 located in Haiti and Canada, respectively.

The $2.5 million as of January 29, 2023, represents right of use assets of $1.6 million and $833,000 located in Haiti and Canada, respectively.

During fiscal 2024 and continuing through the first quarter of fiscal 2025, right of use assets have steadily decreased due to rent expense incurred over the terms of the existing lease agreements.

In addition, in connection with the restructuring activity described above in “—Restructuring Activities,” right of use assets (i) decreased due to the termination of an agreement to lease a facility located in Ouanaminthe, Haiti, and (ii) shortened the period of use associated with two leased facilities located in Quebec, Canada.

The $568,000 as of July 28, 2024, represents right of use assets of $350,000 and $218,000 located in Haiti and Canada, respectively.

The $2.1 million as of July 30, 2023, represents right of use assets of $1.4 million and $720,000 located in Haiti, and Canada, respectively.

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.

Assets Held for Sale

As of July 28, 2024, and in connection with actions described above in “—Restructuring Activities,” we classified certain equipment located at our mattress fabric facility in Quebec, Canada, totaling $357,000 and a right of use asset of $250,000 located at our sewn mattress cover facility located in Ouanaminthe, Haiti, as held for sale.

Refer to Note 9 of the the consolidated financial statements for further details.

Upholstery Fabrics Segment

1 unchanged sentence

(dollars in thousands)

Nine Months Ended

(dollars in thousands)

Upholstery fabrics sales increased 9.2% in the third quarter of fiscal 2024 compared to the prior-year period.

Upholstery fabrics sales decreased 8.6% in the first nine months of fiscal 2024 compared to the first nine months of fiscal 2023.

The increase in upholstery fabrics net sales during the third quarter was driven by the timing of the Chinese New Year holiday (which falls primarily in the fourth quarter of fiscal 2024, as opposed to the third quarter of fiscal 2023), as well as some improvement in residential home furnishing sales during the period.

This increase was partially offset by moderately lower sales in our hospitality/contract fabric business primarily due to the impact of winter weather events in January;

short-term supply chain issues that affected production in our Read business;

and increased construction costs affecting demand for new and ongoing hospitality/contract projects.

The decrease in upholstery fabrics net sales during the first nine months of fiscal 2024 reflects softness in the residential home furnishings industry, where demand was pressured during the first half of the year by a challenging macro-economic environment.

Although we saw a year over year increase in residential fabric sales during the third quarter, the industry demand backdrop for residential home furnishings has deteriorated further than expected during the first few weeks of the fourth quarter, and we expect this ongoing softness may affect demand for our residential business for some time.

Upholstery fabrics sales increased 3.7% in the first quarter of fiscal 2025 compared to the prior-year period.

This increase in net sales for our upholstery fabrics segment reflects improved demand for our residential upholstery fabrics business and our hospitality/commercial business as compared to the prior-year period, although overall industry weakness continues to affect the residential home furnishings industry.

Looking ahead, we expect the soft industry demand backdrop for residential home furnishings may affect our residential business for some period of time.

Despite this challenge, we believe our business is well positioned for the long term with our product-driven strategy and innovative product offerings, including our popular portfolio of LiveSmart® performance products, supported by our flexible Asian platform and our long-term supplier relationships.

We also believe overall demand remains solid for our hospitality/contract business.

Notably, the potential ongoing geopolitical disruptions related to wars in Ukraine and the Middle East, as well as the economic and health effects from possible additional surges in the coronavirus, remain unknown and depend on factors beyond our control.

At this time, we cannot reasonably estimate the impact on our upholstery fabrics segment, but we note that if conditions worsen in any of these situations, including additional COVID-related shutdowns of our China operations, the impact on our operations, and/or on our suppliers, customers, consumers, and the global economy, could adversely affect our financial performance.

Gross Profit, Selling, General & Administrative Expenses, and Income (Loss) from Operations

We also believe overall demand remains solid for our hospitality/commercial business.

Notably, the potential ongoing geopolitical disruptions related to wars in Ukraine and the Middle East remain unknown and depend on factors beyond our control.

At this time, we cannot reasonably estimate the impact on our upholstery fabrics segment, but we note that if conditions worsen in these situations, including shipping disruptions related to wars in the Middle East, the impact on our operations, and/or on our suppliers, customers, consumers, and the global economy, could adversely affect our financial performance.

Gross Profit, Selling, General & Administrative Expenses, and Income from Operations

Three Months Ended

1 unchanged sentence

Selling, general, and administrative expenses

Restructuring (credit) expense

Income (loss) from operations

Operating margin

Nine Months Ended

(dollars in thousands)

Selling, general, and administrative expenses

Restructuring expense

1 unchanged sentence

Operating margin

The increase in upholstery fabrics profitability for the third quarter of fiscal 2024, as compared to the prior year period (which was negatively affected by restructuring and related charges), primarily reflects higher sales volume;

a more profitable mix of sales;

a more favorable foreign exchange rate in China;

and lower fixed costs resulting from the previous restructuring of the upholstery fabrics segment's cut and sew platforms.

These factors were partially offset by lower hospitality/contract sales and higher SG&A expense during the period.

The increase in upholstery fabrics profitability for the first nine months of fiscal 2024, as compared to the prior-year period (which was negatively affected by higher than normal inventory markdowns and restructuring and related charges), primarily reflects a more profitable mix of sales;

better inventory management;

a more favorable foreign exchange rate in China;

lower fixed costs resulting from the previous restructuring of the upholstery fabrics cut and sew platform;

and lower freight costs.

These factors were partially offset by lower residential fabric sales and higher SG&A expense during the period.

The increase in SG&A expense during both the third quarter and the first nine months of fiscal 2024, as compared to the prior-year periods, was mostly due to wage inflation, higher professional and consulting fees, higher travel and tradeshow costs as business travel and industry tradeshows have resumed, and an increase in sampling expense driven by new product roll outs.

Looking ahead, the residential home furnishings industry remains under pressure, and we expect further deterioration during the fourth quarter of fiscal 2024 due to shifting consumer demand trends and inflation affecting overall consumer spending.

As a result, we expect lower sales volumes in our residential business will continue to affect our profitability.

However, we still expect to benefit in fiscal 2024 from (i) our strategic decision to discontinue production of cut and sewn upholstery kits in Haiti;

(ii) improved inventory management;

(iii) a solid hospitality/contract fabric business;

and (iv) improvement in our Read business.

We will also continue our ongoing cost reduction efforts and will consider further adjustments to right-size and restructure our operations as necessary to align with current demand levels, while maintaining our ability to service our customers.

Income from operations was $1.7 million for the first quarter of fiscal 2025, compared to income from operations of $1.3 million for the first quarter of fiscal 2024.

The increase in upholstery fabrics profitability for the first quarter of fiscal 2025, as compared to the prior-year period, primarily reflects higher sales, lower fixed costs, and lower SG&A expense, offset somewhat by higher freight costs during the period.

Based on market dynamics, we took action during the fourth quarter of fiscal 2024 to restructure our upholstery fabrics finishing operation in China to align with current demand and further leverage our strategic supply relationships.

We completed this restructuring initiative during the first quarter of fiscal 2025 (see “—Restructuring Activities—Shanghai, China—Upholstery Fabrics Finishing Operation” below).

We believe this move will allow us to reduce our operating costs while maintaining our ability to support our customers.

Looking ahead, the residential home furnishings industry remains under pressure due to shifting consumer spending trends, inflation, reduced home sales, and other macroeconomic conditions affecting discretionary consumer spending.

As a result, we expect lower sales volumes in our residential business may affect our profitability until market conditions improve.

However, for fiscal 2025, we expect to benefit from continued solid demand in our hospitality/commercial fabrics business;

improvement in our Read business;

and fixed cost savings from our strategic decision to rationalize our upholstery fabric finishing operation in China and further leverage our long-term supply relationships.

We will also continue our ongoing cost reduction efforts and will consider further adjustments to rationalize our operations as necessary to align with current demand levels, while maintaining our ability to service our customers.

Restructuring Activities

Shanghai, China

Upholstery Fabrics Finishing Operation

During the fourth quarter of fiscal 2024, we rationalized our upholstery fabrics finishing operation in Shanghai, China, to align with current demand trends and further leverage our strategic supply relationships to meet customer finishing needs.

This restructuring activity was completed during the first quarter of fiscal 2025 and resulted in cumulative restructuring and restructuring related charges totaling $218,000.

Ouanaminthe, Haiti

Cut and Sew Upholstery Fabrics Operation

During the third quarter of fiscal 2023, Culp Upholstery Fabrics Haiti, Ltd.

("CUF Haiti") entered into an agreement to terminate a lease associated with a facility located in Ouanaminthe, Haiti, and, in turn, moved its production of upholstery cut and sew kits to an existing facility leased by Culp Home Fashions Haiti, Ltd.

("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.

Haiti and CHF Haiti are indirect wholly-owned subsidiaries of the company.

Both CUF Haiti and CHF Haiti are

indirectly wholly-owned subsidiaries of the company.

During the first quarter of fiscal 2024, demand for upholstery cut and sewn kits declined more than previously anticipated, resulting in the strategic action to discontinue the production of upholstery cut and sew kits in Haiti.

Shanghai, China

During the second quarter of fiscal 2023, we closed our cut and sew upholstery fabrics operation located in Shanghai, China, which included the termination of an agreement to lease a building.

This strategic action, along with the further use of our Asian supply chain, was taken in order to adjust our operating costs to better align with the declining customer demand for cut and sewn products.

The following summarizes our restructuring expense and restructuring related charges from both our restructuring activities noted above for the nine months ending January 28, 2024, and January 29, 2023:

Nine Months Ended

January 28, 2024

January 29, 2023

Lease termination costs

This restructuring activity was completed during the third quarter of fiscal 2024 and resulted in a cumulative restructuring and restructuring related charges of $1.3 million.

The following summarizes our restructuring expense and restructuring related charges for all restructuring activities for the upholstery fabrics segment for the three- months ending July 28, 2024, and July 30, 2023:

Three Months Ended

(dollars in thousands)

July 28, 2024

July 30, 2023

Employee termination benefits

Impairment loss - leasehold improvements and equipment

Impairment loss and disposal of equipment

Loss on disposal and markdowns of inventory

1 unchanged sentence

Restructuring expense and restructuring related charges (3) (4)

(1) Of the total $472,000, $432,000 and $40,000 were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the nine-month period ending January 28, 2024.

(2) Of the total $1.4 million, $1.3 million and $98,000 were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the nine-month period ending January 29, 2023.

See Note 9 of the consolidated financial statement for further details regarding our restructuring activities.

(1) Of the $132,000 total, $118,000 affected our U.S.

upholstery fabrics operations and related to cost reductions under the Fiscal 2025 Restructuring Plan, which is described in Note 9 of the consolidated financial statements.

In addition, the $132,000 includes $14,000 related to the rationalization of our upholstery fabrics finishing operation located in Shanghai, China, as described above.

(2) The total $517,000 related to the closure of our upholstery cut and sewn kits operation located in Ouanaminthe, Haiti, as described above.

(3) The total $132,000 was recorded within restructuring expense in the Consolidated Statement of Net Loss for the three-month period ending July 28, 2024.

(4) Of the $517,000 total, $338,000 and $179,000 was recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month period ending July 30, 2023.

Segment Assets

Segment assets consist of accounts receivable, inventory, property, plant, and equipment, right of use assets, and assets held for sale:

Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets:

(dollars in thousands)

January 28, 2024

January 29, 2023

July 28, 2024

July 30, 2023

April 28, 2024

2 unchanged sentences

Right of use assets

Assets held for sale

Refer to Note 13 of the consolidated financial statements for disclosures regarding determination of our segment assets.

Accounts Receivable

As of January 28, 2024, accounts receivable decreased by $704,000, or 5.4%, compared with January 29, 2023.

Although net sales increased by 9.2% during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023, accounts receivable decreased.

This trend reflects a timing difference of cash receipts from certain significant customers during the last week of the third quarter of fiscal 2024, which cash receipts did not occur during the third quarter of fiscal 2023.

It also reflects the expiration of extended credit terms with certain customers.

As a result, days’ sales outstanding for this segment decreased to 31 days for the third quarter of fiscal 2024, as compared with 38 days for the third quarter of fiscal 2023.

As of January 28, 2024, accounts receivable decreased by 1.3%, compared with April 30, 2023.

This trend reflects a static net sales of $30.4 million for the third quarter of fiscal 2024, that was comparable with net sales of $30.7 million during the fourth quarter of fiscal 2023.

Days' sales outstanding was 31 days for the third quarter of fiscal 2024, as compared with 33 days for the fourth quarter of fiscal 2023.

As of January 28, 2024, inventory increased by 0.4%, compared with January 29, 2023.

Although net sales increased by 9.2% during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023, inventory remained flat as inventory levels were well managed in relation to current customer demand trends.

As of January 28, 2024, inventory decreased by $454,000, or 2.3%, compared with April 30, 2023.

The trend reflects a modest decrease in net sales of 1.1% during the third quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023.

Net sales for the third quarter of fiscal 2024 were $30.4 million, compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.

Inventory turns were 5.1 for the third quarter of fiscal 2024, compared with 4.1 for the third quarter of fiscal 2023 and 4.8 for the fourth quarter of fiscal 2023.

As of July 28, 2024, accounts receivable remained flat as compared with July 30, 2023.

This reflects a 3.7% increase in net sales for the first quarter of fiscal 2025, as compared with the prior-year period, offset by faster cash collections from a significant customer who utilized more cash discounts during the first quarter of fiscal 2025, as compared with the prior-year period.

As a result, days’ sales outstanding for this segment decreased to 32 days for the first quarter of fiscal 2025, compared with 35 days for the first quarter of fiscal 2024.

As of July 28, 2024, accounts receivable remained flat compared with April 28, 2024.

This reflects a significant increase in net sales during the first quarter of fiscal 2025, as compared with the fourth quarter of fiscal 2024.

Net sales for the first quarter of fiscal 2025 were $28.5 million, an increase of $4.7 million, or 19.7%, compared with net sales of $23.8 million for the fourth quarter of fiscal 2024.

However, this increase was offset by faster cash collections from a significant customers during the first quarter of fiscal 2025, as compared with the fourth quarter of fiscal 2024.

As a result, days’ sales outstanding for this segment decreased to 32 days for the first quarter of fiscal 2025, compared with 37 days for the fourth quarter of fiscal 2024.

As of July 28, 2024, inventory decreased by $2.8 million, or 14.8%, compared with July 30, 2023.

Although this segment's net sales increased during the first quarter of fiscal 2025, as compared with the prior-year period (as described above), this decrease in inventory reflects management's ability to maintain an appropriate level of inventory, taking into account current and expected future demand trends and any changes in our global supply chain.

As of July 28, 2024, inventory decreased by $782,000, or 4.6%, compared with April 28, 2024.

Although this segment's net sales significantly increased during the first quarter of fiscal 2025, as compared with the fourth quarter of fiscal 2024, this decrease in inventory reflects management's ability to maintain an appropriate level of inventory, taking into account current and expected future demand trends and any changes in our global supply chain.

Net sales for the first quarter of fiscal 2025 were $28.5 million, an increase of $4.7 million, or 19.7%, compared with net sales of $23.8 million for the fourth quarter of fiscal 2024.

Inventory turns were 5.3 for the first quarter of fiscal 2025, compared with 4.4 for the first quarter of fiscal 2024 and 4.4 for the fourth quarter of fiscal 2024.

Property, Plant, & Equipment

As of January 28, 2024, property, plant, and equipment steadily decreased compared to January 29, 2023, and April 30, 2023, due to (i) impairment charges of $329,000 related to our strategic action to discontinue the production of upholstery cut and sew kits in Ouanaminthe, Haiti, and (ii) a reduction in capital spending as a result of current and expected unfavorable macro-economic conditions.

The $1.2 million as of January 28, 2024, represents property, plant, and equipment of $1.1 million and $134,000 located in the U.S.

and China, respectively.

The $1.8 million as of January 29, 2023, represents property, plant, and equipment of $1.0 million, $630,000, and $121,000 located in the U.S., Haiti, and China, respectively.

The $1.7 million as of April 30, 2023, represents property, plant, and equipment of $974,000, $592,000, and $105,000 located in the U.S., Haiti, and China, respectively.

As of July 28, 2024, property, plant, and equipment steadily decreased compared with July 30, 2023, and April 28, 2024, due to a reduction in capital spending as a result of current unfavorable macro-economic conditions within the home furnishings industry.

The $1.1 million as of July 28, 2024, represents property, plant, and equipment of $990,000 and $108,000 located in the U.S., and China, respectively.

The $1.5 million as of July 30, 2023, represents property, plant, and equipment of $1.0 million, $327,000, and $159,000 located in the U.S., Haiti, and China, respectively.

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.

Right of Use Assets

As of January 28, 2024, right of use assets has steadily decreased compared with January 29, 2023, and April 30, 2023.

This is due to rent expense incurred over the terms of existing lease agreements, partially offset by the renewal of our agreement to lease our facility associated with Read and certain facilities associated with our operations located in China.

The $2.3 million as of January 28, 2024, represents right of use assets of $944,000 and $1.4 million located in China and the U.S., respectively.

The $3.0 million as of January 29, 2023, represents right of use assets of $1.7 million and $1.3 million located in China and the U.S., respectively.

The $2.6 million as of April 30, 2023, represents right of use assets of $1.5 million and $1.1 million, located in China and the U.S., respectively.

Assets Held for Sale

The $2.0 million as of January 29, 2023, represents a right of use asset associated with an agreement to lease a facility located in Ouanaminthe, Haiti, which such lease was terminated in connection with a restructuring activity.

See Note 9 of the consolidated financial statement for further details regarding our restructuring activity associated with our upholstery cut and sew operation located in Ouanaminthe, Haiti.

This right of use asset was sold to a third party during the fourth quarter of fiscal 2023, which resulted in a note receivable.

See Note 7 to the consolidated financial statements for further details regarding this note receivable.

As of July 28, 2024, right of use assets steadily decreased compared with July 30, 2023, and April 28, 2024.

This decrease mostly resulted from rent expense incurred over the terms of the existing respective lease agreements and the termination of our agreement to lease a building associated with our upholstery fabrics finishing operation located in Shanghai, China.

The $1.5 million as of July 28, 2024, represents right of use assets of $1.1 million and $393,000 located in the U.S., and China, respectively.

The $2.2 million as of July 30, 2023, represents right of use assets of $1.2 million and $977,000 located in China and the U.S., respectively.

The $2.0 million as of April 28, 2023, represents right of use assets of $1.3 million and $709,000 located in China and the U.S., respectively.

Other Income Statement Categories

1 unchanged sentence

(dollars in thousands)

January 28, 2024

January 29, 2023

SG&A expenses

Interest income

Other expense

Nine Months Ended

(dollars in thousands)

January 28, 2024

January 29, 2023

July 28, 2024

July 30, 2023

SG&A expenses

Interest income

Other expense

Selling, General, and Administrative Expenses

The increase in selling, general, and administrative expenses during the third quarter and first nine months of fiscal 2024, compared with the third quarter and first nine months of fiscal 2023, is due to a variety of factors, including (i) wage inflation;

(ii) higher professional and consulting fees;

(iii) an increase in provision for bad debts reflecting current unfavorable macro-economic conditions relating to furniture and bedding products;

and (iv) an increase in sampling expense driven by new product roll outs in both business segments.

Other expense (income)

Selling, General, and Administrative Expenses ("SG&A")

The decrease in selling, general, and administrative expenses during the first quarter of fiscal 2025, as compared with the first quarter of fiscal 2024, relates to a variety of items including:

(i) lower stock-based compensation expense reflecting less favorable financial results in relation to pre-established targets;

(ii) lower professional and consulting fees;

and (iii) a decrease in customer samples expense.

Interest Income

The increase in interest income is due primarily to higher market interest rates during the third quarter and first nine months of fiscal 2024, as compared with the third quarter and first nine months of fiscal 2023.

Other Expense

The decrease in interest income is due to a lower average cash balance during the first quarter of fiscal 2025, as compared with the first quarter of fiscal 2024.

Other (Expense) Income

Management is required to assess certain economic factors to determine the currency of the primary economic environment in which our foreign subsidiaries operate.

Based on our assessments, the U.S.

dollar was determined to be the functional currency of our operations located in China and Canada.

The decrease in other expense during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023, is due mostly to more favorable foreign currency exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S.

dollar financial reporting amounts during third quarter, as compared with the third quarter of fiscal 2023.

During the third quarter of fiscal 2024, we reported a foreign currency exchange loss associated with our operations located in China of $290,000, compared with $757,000 during the third quarter of fiscal 2023.

The decrease in other expense due to more favorable foreign exchange rates noted above, was partially offset by an increase in unrealized gains associated with our rabbi trust that funds our deferred compensation liability.

The increase in other expense during the first nine months of fiscal 2024, as compared with the first nine months of fiscal 2023, is mostly due to the increase in fees associated with our ABL Credit Agreement effective on January 19, 2023.

See Note 10 located in the consolidated financial statements for further details.

In addition, the increase in other expense is due an increase in unrealized gains associated with our rabbi trust that increased our deferred compensation liability.

A foreign currency exchange gain of $389,000 was reported during the first nine months of fiscal 2024 that (i) related to our operations located in China, (ii) was mostly non-cash, and (iii) was offset by a $477,000 income tax charge.

This income tax charge of $477,000 was associated with taxable foreign currency exchange gains based on less favorable foreign currency exchange rates applied against balance sheet accounts denominated in U.S.

dollar was determined to be the functional currency of our operations located in China, Canada, and Vietnam.

The change in other expense during the first quarter of fiscal 2025, as compared with other income during the first quarter of fiscal 2024, is due mostly to less favorable foreign currency exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S.

dollar financial reporting amounts during the first quarter of fiscal 2025, as compared with the first quarter of fiscal 2024.

During the first quarter of fiscal 2025, we reported a foreign currency exchange loss associated with our operations located in China totaling $46,000 compared with a foreign currency exchange gain of $451,000 during the first quarter of fiscal 2024.

The $46,000 foreign currency exchange loss related to our operations in China was mostly non-cash and was partially offset by $(37,000) of income tax benefit, which will decrease our income tax payments and withholding tax payments associated with future earnings and profits repatriated from our operations located in China to the company's U.S.

The income tax benefit of $(37,000) was associated with taxable foreign currency exchange losses based on less favorable foreign currency exchange rates applied against balance sheet accounts denominated in U.S.

dollars to determine the corresponding Chinese Renminbi local currency amounts.

The foreign currency exchange rate gains incurred on our U.S.

dollar denominated balance sheet accounts associated with our operations located in China are considered taxable income, as we incur income tax expense and pay income taxes in China's local currency.

The $477,000 income tax charge represents an increase in our income tax payments and withholding tax payments associated with future earnings and profits that will ultimately be repatriated from our operations located in China to the company's U.S.

The foreign currency exchange rate gains (losses) related to our U.S.

dollar denominated balance sheet accounts associated with our operations located in China are considered taxable income or tax deductible, as we incur income tax expense (benefit) and pay income taxes in China's local currency.

Effective Income Tax Rate & Income Tax Expense

Our effective income tax rates for the nine-month periods ended January 28, 2024, and January 29, 2023, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods.

When calculating the annual estimated effective income tax rates for the nine-month periods ended January 28, 2024, and January 29, 2023, we were subject to loss limitation rules.

We recorded income tax expense of $240,000, or (3.4%) of loss before income taxes, for the three-month period ending July 28, 2024, compared with income tax expense of $701,000, or (26.5%) of loss before income taxes, for the three-month period ending July 30, 2023.

Our effective income tax rates for the three-month periods ended July 28, 2024, and July 30, 2023, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods.

When calculating the annual estimated effective income tax rates for the three-month periods ended July 28, 2024, and July 30, 2023, we were subject to loss limitation rules.

These loss limitation rules require any taxable loss associated with our U.S.

1 unchanged sentence

The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S.

operations and foreign subsidiaries located in

China, Canada, and Haiti as compared to annual projections, as well as changes in foreign currency exchange rates in relation to the U.S.

operations and foreign subsidiaries located in China, Canada, Haiti, and Vietnam versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S.

The following schedule summarizes the principal differences between income tax expense at the U.S.

federal income tax rate and the effective income tax rate reflected in the consolidated financial statements for the nine-month periods ending January 28, 2024, and January 29, 2023:

federal income tax rate and the effective income tax rate reflected in the consolidated financial statements for the three-month periods ending July 28, 2024, and July 30, 2023:

federal income tax rate

1 unchanged sentence

Withholding taxes associated with foreign jurisdictions

Capital expenditure deduction - Quebec, Canada

Foreign income tax rate differential

1 unchanged sentence

Tax effects of local currency foreign exchange gains

Our consolidated effective income tax rates during the first nine months of fiscal 2024 and fiscal 2023 were both adversely affected by the mix of earnings between our U.S.

operations and foreign subsidiaries, as our taxable income stems from our operations located in China during fiscal 2024 and from our operations located in both China and Canada during fiscal 2023, each of which has higher income tax rates than the U.S.

In addition, during the first nine months of fiscal 2024 and the first nine months of fiscal 2023, we incurred pre-tax losses associated with our U.S.

Uncertain income tax positions

Our consolidated effective income tax rates during the first quarter of fiscal 2025 and the first quarter of fiscal 2024 were both adversely affected by the mix of earnings between our U.S.

operations and foreign subsidiaries, as our taxable income stems mostly from our operations located in China, which has a higher income tax rate than the U.S.

In addition, during the first quarters of fiscal 2025 and 2024, we incurred pre-tax losses associated with our U.S.

operations, for which an income tax benefit was not recorded due to the full valuation allowance applied against our U.S.

net deferred income tax assets (as described below).

net deferred income tax assets.

The income tax charge associated with the full valuation allowance applied against our U.S.

net deferred income tax assets was lower during the first nine months of fiscal 2024 compared with the first nine months of fiscal 2023, as our $(11.3) million U.S.

pre-tax loss incurred during the first nine months of fiscal 2024 was significantly lower than the $(28.8) million U.S.

pre-tax loss incurred during the first nine months of fiscal 2023.

During the first nine months of fiscal 2024, we incurred a lower consolidated pre-tax loss totaling $(6.7) million, compared with $(24.5) million during the first nine months of fiscal 2023.

net deferred income tax assets was greater during the first quarter of fiscal 2025 compared with the first quarter of fiscal 2024, as our $(7.0) million U.S.

pre-tax loss incurred during the first

quarter of fiscal 2025 was significantly greater than the $(3.3) million U.S.

pre-tax loss incurred during the first quarter of fiscal 2024.

During the first quarter of fiscal 2025, we incurred a greater consolidated pre-tax loss totaling $(7.0) million, compared with $(2.6) million during the first quarter of fiscal 2024.

As a result, the principal differences between income tax expense at the U.S.

Valuation Allowance

3 unchanged sentences

Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.

As of January 28, 2024, we evaluated the realizability of our U.S.

As of July 28, 2024, we evaluated the realizability of our U.S.

net deferred income tax assets to determine if a full valuation allowance was required.

6 unchanged sentences

net deferred income tax assets.

Based on our assessments as of January 28, 2024, January 29, 2023, and April 30, 2023, valuation allowances against our net deferred income tax assets pertain to the following:

Based on our assessments as of July 28, 2024, July 30, 2023, and April 28, 2024, valuation allowances against our net deferred income tax assets pertain to the following:

(dollars in thousands)

January 28, 2024

January 29, 2023

July 28, 2024

July 30, 2023

April 28, 2024

2 unchanged sentences

Undistributed Earnings

Refer to Note 14 of the consolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances associated with undistributed earnings from our foreign subsidiaries as of January 28, 2024, January 29, 2023, and April 30, 2023, respectively.

Refer to Note 14 of the consolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances associated with undistributed earnings from our foreign subsidiaries as of July 28, 2024, July 30, 2023, and April 30, 2023, respectively.

Uncertain Income Tax Positions

Refer to Note 14 of the consolidated financial statements for disclosures regarding our assessments of our uncertain income tax positions as of January 28, 2024, January 29, 2023, and April 30, 2023, respectively.

Refer to Note 14 of the consolidated financial statements for disclosures regarding our assessments of our uncertain income tax positions as of July 28, 2024, July 30, 2023, and April 28, 2024, respectively.

Income Taxes Paid

The following table sets forth income taxes paid by jurisdiction for the nine months ended January 28, 2024, and January 29, 2023, respectively:

The following table sets forth taxes paid by jurisdiction for the three months ending July 28, 2024, and July 30, 2023, respectively:

(dollars in thousands)

United States Transition Tax Payment

China Income Taxes, Net of Refunds

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Future Liquidity

We are currently projecting annual cash income tax payments of approximately $3.2 million for fiscal 2024, compared with $2.3 million for fiscal 2023.

Our estimated income tax payments for fiscal 2024 are management’s current projections only and can be affected by actual earnings from our foreign subsidiaries located in China and Canada versus annual projections;

changes in the foreign exchange rates associated with our China operations in relation to the U.S.

the timing of when we will repatriate earnings and profits from China and Canada;

and the timing of when significant capital projects will be placed into service, which determines the deductibility of accelerated depreciation.

Additionally, we currently expect to pay minimal income taxes in the U.S.

on a cash basis during fiscal 2024 due to the immediate expensing of U.S.

Based on the restructuring plan approved by our board of directors on April 29, 2024, the timing and success of the closure of our Canadian operation, along with the sale of associated real estate (the timing and amount of which sales price is currently

undetermined), could have a significant effect on (i) the amount and timing of when and if fiscal 2024 income tax payments will be required;

(ii) the amount and timing of withholding tax payments to the Canadian government associated with the repatriation of earnings and profits to the U.S.

and (iii) the respective tax rates that will be applied on the sale of real estate and equipment.

Accordingly, we believe we cannot provide a reasonable estimate of our fiscal 2025 income tax payments associated with our Canadian operation at this time.

Currently, we are projecting annual cash income tax payments of approximately $2.0 million associated with our operations located in China.

This estimate is management's current projection only and can be affected by actual earnings versus annual projections, changes in the foreign exchange rates in relation to the U.S.

dollar, and the timing of when we will repatriate earnings and profits from China to our U.S.

Currently, we do not expect to incur any income taxes in the U.S.

on a cash basis during fiscal 2025 due to (i) the accelerated expensing of U.S.

capital expenditures and our existing U.S.

federal net operating loss carryforwards that totaled $49.4 million as of April 30, 2023, which are projected to increase as a result of the significant U.S.

loss carryforward we expect to generate during fiscal 2024.

As of January 28, 2024, we will be required to pay annual U.S.

federal net operating loss carryforwards totaling $69.6 million as of April 28, 2024.

As of July 28, 2024, we will be required to pay annual U.S.

federal transition tax payments, in accordance with the 2017 Tax Cuts and Jobs Act, as follows:

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and FY 2026 - $831,000.

The annual U.S.

federal transition tax payment of $665,000 was paid during the second quarter of fiscal 2025.

Liquidity and Capital Resources

Currently, our sources of liquidity include cash and cash equivalents (collectively, "cash"), cash flow from operations, and amounts available under our revolving credit lines.

As of January 28, 2024, we believe our cash of $12.6 million and the current availability under our revolving credit lines totaling $26.2 million (Refer to Note 10 of the consolidated financial statements for further details) will be sufficient to fund our foreseeable business needs, commitments, and contractual obligations.

As of January 28, 2024, our cash totaled $12.6 million, a decrease of $8.4 million compared with cash of $21.0 million as of April 30, 2023.

This decrease was mostly due to net cash used in operating activities totaling $(6.0) million and capital expenditures mostly related to our mattress fabrics segment totaling $(3.2) million, partially offset by proceeds from the sale of our rabbi trust investments totaling $1.2 million to fund withdrawals from our deferred compensation plan for certain retired employees (see offsetting decrease to the decrease in deferred compensation liability in item (iii) of the below paragraph).

primarily reflects (i) a significant decrease in inventory during the first nine months of fiscal 2023 due to improved alignment of inventory purchases with customer demand trends, promotional programs to reduce aged raw materials and finished goods inventory, and a significant decline net sales of (27.1%) during the period, which did not recur during the first nine months of fiscal 2024;

(ii) annual incentive payments made during the first quarter of fiscal 2024, which did not occur during the first quarter of fiscal 2023;

and (iii) payments to certain retired employees totaling $1.2 million for withdrawals from our deferred compensation plan during the first nine months of fiscal 2024;

partially offset by (iv) an increase in cash earnings during the first nine months of fiscal 2024 compared with the first nine months of fiscal 2023.

As of January 28, 2024, there were no outstanding borrowings under our lines of credit.

As of July 28, 2024, we believe our cash of $13.5 million and the current availability under our revolving credit lines totaling $19.2 million will be sufficient to fund our foreseeable business needs, capital expenditures, commitments, and contractual obligations.

Refer to Note 10 of the consolidated financial statements for further information regarding our revolving credit lines.

As of July 28, 2024, our cash totaled $13.5 million, an increase of $3.5 million compared with cash of $10.0 million as of April 28, 2024.

This increase was mostly due $4.0 million in cash proceeds from borrowings on our line of credit associated with our operations located in China, partially offset by capital expenditures totaling $501,000.

(ii) a decrease in inventory due to improved inventory management for both the mattress fabrics and upholstery fabrics segments and due to the gradual wind down of operations at the company's manufacturing facility in Quebec, Canada, as described above in the section titled “—Segment Analysis — Mattress Fabrics Segment — Restructuring Activities” of this Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION;

As of July 28, 2024, we had outstanding borrowings totaling $4.0 million under a line of credit agreement associated with our operations located in China.

Refer to Note 10 of the consolidated financial statements for further information regarding our revolving this line of credit.

The income taxes we pay also affect our liquidity.

See the above section titled “Income Taxes Paid” of this Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION for further detail.

Our cash balance may be adversely affected by factors beyond our control, such as (i) recent customer demand trends, (ii) supply chain disruptions, (iii) rising interest rates and inflation, (iv) world events (including wars in Ukraine and the Middle East), and (v) the continuing uncertainty associated with COVID-19.

Our cash balance may be adversely affected by factors beyond our control, such as (i) recent customer demand trends affecting net sales, (ii) supply chain disruptions, (iii) higher interest rates and inflation, (iv) world events (including wars in Ukraine and Middle East), and (v) the continuing uncertainty associated with COVID-19.

These factors could cause delays in receipt of payment on accounts receivable and could increase cash disbursements due to rising prices.

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(dollars in thousands)

January 28, 2024

January 29, 2023

April 30, 2023

United States

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The number of shares purchased and the timing of such purchases are based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.

We did not repurchase any shares of common stock during either of the nine-month periods ending January 28, 2024, or January 29, 2023, respectively.

As a result, as of January 28, 2024, $3.2 million is available for additional repurchases of our common stock.

Despite the current share repurchase authorization, the company does not expect to repurchase any shares through at least the fourth quarter of fiscal 2024.

In June 2022, our board of directors suspended the company’s quarterly cash dividend.

Considering the current and expected macroeconomic conditions, we believe that preserving capital and managing our liquidity is in the company’s best interest to support future growth and the long-term interests of our shareholders.

Accordingly, we do not expect to pay any dividends through at least the fourth quarter of fiscal 2024.

We did not repurchase any shares of common stock during the three-month periods ending July 28, 2024, and July 30, 2023, respectively.

As of July 28, 2024, $3.2 million is available for additional repurchases of our common stock.

On June 29, 2022, our board of directors announced the decision to suspend the company’s quarterly cash dividend.

We believed that preserving capital and managing our liquidity were in the company’s best interest to support future growth and the long-term interests of our shareholders.

Accordingly, we did not make any dividend payments during the first quarter of fiscal 2025, fiscal 2024, and fiscal 2023.

Working Capital

Operating Working Capital

Operating working capital (the total of accounts receivable and inventories, less accounts payable-trade, less accounts payable-capital expenditures, and less deferred revenue) was $39.0 million as of January 28, 2024, compared with $44.9 million as of January 29, 2023, and $39.2 million as of April 30, 2023.

Operating working capital turnover was 5.9 during the third quarter of fiscal 2024, compared with 4.1 during the third quarter of fiscal 2023, and 4.6 during the fourth quarter of fiscal 2023.

Operating working capital (the total of accounts receivable and inventories, less accounts payable-trade, less accounts payable-capital expenditures, and less deferred revenue) was $35.1 million as of July 28, 2024, compared with $38.7 million as of July 30, 2023, and $38.5 million as of April 28, 2024.

Operating working capital turnover was 5.9 during the first quarter of fiscal 2025, compared with 5.0 during the first quarter of fiscal 2024 and 5.8 during the fourth quarter of fiscal 2024.

Accounts Receivable

Accounts receivable was $23.7 million as of January 28, 2024, an increase of $2.5 million, or 11.5%, compared with $21.2 million as of January 29, 2023.

This increase mostly reflects a 15.0% increase in net sales during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023.

Days’ sales outstanding were 33 days during the third quarter of fiscal 2024, compared with 34 days during the third quarter of fiscal 2023.

Accounts receivable was $23.7 million as of January 28, 2024, a decrease of $1.1 million, or 4.4%, compared with $24.8 million as of April 30, 2023.

This decrease primarily reflects a decrease in net sales during the third quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023.

Net sales were $60.4 million during the third quarter of fiscal 2024, a decrease of $1.0 million, or 1.6%, compared with net sales of $61.4 million during the fourth quarter of fiscal 2023.

In addition, this decrease reflects faster cash collections associated with our mattress fabrics segment, as we had a mix of higher sales to customers with longer credit terms during the fourth quarter of fiscal 2023, as compared with the third quarter of fiscal 2024.

As a result, days’ sales outstanding decreased to 33 days during the third quarter of fiscal 2024, a decrease from 35 days during the fourth quarter of fiscal 2023.

Inventory was $46.9 million as of January 28, 2024, a decrease of $750,000, or 1.6%, compared with $47.6 million as of January 29, 2023.

Although net sales increased by 15.0% during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023, inventory modestly decreased during the third quarter of fiscal 2024, as compared with the prior-year period, as inventory levels were well managed in relation to current customer demand trends by both our mattress and upholstery fabrics segments, and our mattress fabrics segment implemented promotional programs to reduce aged raw materials and finished goods.

Inventory was $46.9 million as of January 28, 2024, an increase of $1.8 million, or 4.0%, compared with $45.1 million as of April 30, 2023.

This trend primarily reflects lower than anticipated demand trends associated with our mattress fabrics segment during the third quarter of fiscal 2024, compared with the second quarter of fiscal 2024.

Net sales related to our mattress fabrics segment for the third quarter of fiscal 2024 were $30.0 million, a decrease of 4.3%, compared with net sales of $31.4 million during the second quarter of fiscal 2024.

Inventory turns were 4.5 for the third quarter of fiscal 2024, as compared with 4.0 for the third quarter of fiscal 2023 and 4.7 for the fourth quarter of fiscal 2023.

Accounts receivable was $21.6 million as of July 28, 2024, a decrease of $1.0 million, or 4.5%, compared with $22.6 million as of July 30, 2023.

This decrease was due to faster cash collections from significant customers in both our mattress fabrics and upholstery fabrics segments who utilized more cash discounts during the first quarter of fiscal 2025, as compared with the first quarter of fiscal 2024.

As a result, days’ sales outstanding decreased to 32 days for the first quarter of fiscal 2025, compared with 35 days for the first quarter of fiscal 2024.

Accounts receivable was $21.6 million as of July 28, 2024,and remained flat as compared with $21.1 million as of April 28, 2024.

This reflects an increase in net sales during the first quarter of fiscal 2025, as compared with the fourth quarter of fiscal 2024.

Net sales for the first quarter of fiscal 2025 were $56.5 million, an increase of $7.0 million, or 14.2%, compared with net sales of $49.5 million for the fourth quarter of fiscal 2024.

However, this increase was offset by faster cash collections from significant customers in both our mattress fabrics and upholstery fabrics segments who utilized more cash discounts during the first quarter of fiscal 2025, as compared with the fourth quarter of fiscal 2024.

As a result, days’ sales outstanding decreased to 32 days for the first quarter of fiscal 2025, compared with 36 days for the fourth quarter of fiscal 2024.

Inventory was $41.7 million as of July 28, 2024, a decrease of $2.1 million, or 4.9%, compared with $43.8 million as of July 30, 2023.

This decrease in inventory mostly pertains to our upholstery fabrics segment and reflects management's ability to maintain an appropriate level of inventory, taking into account current and expected future demand trends and any changes in our global supply chain.

Inventory was $41.7 million as of July 28, 2024, a decrease of $3.2 million, or 7.1%, compared with $44.8 million as of April 28, 2024.

This decrease in inventory primarily relates to improved inventory management for both the mattress fabrics and upholstery fabrics segments during the first quarter of fiscal 2025, as compared with the fourth quarter of fiscal 2024, taking into account current and expected future demand trends.

Inventory turns were 4.8 for the first quarter of fiscal 2025, as compared with 4.5 for the first quarter of fiscal 2024 and 3.9 for the fourth quarter of fiscal 2024.

Accounts Payable - Trade

Accounts payable - trade was $29.8 million as of January 28, 2024, an increase of $7.3 million, or 32.2%, compared with $22.5 million as of January 29, 2023.

This increase is mostly due to the timing of vendor payments associated with the Chinese New Year holiday, where a higher level of vendor payments was made prior to January 29, 2023, as compared with January 28, 2024.

Accounts payable - trade was $29.8 million as of January 28, 2024, a decrease of 1.2% compared with $29.4 million as of April 30, 2023.

This trend reflects a decline in net sales during the third quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023.

Net sales were $60.4 million during the third quarter of fiscal 2024, a decrease of $1.0 million, or 1.6%, compared with net sales of $61.4 million during the fourth quarter of fiscal 2023.

Accounts payable was $26.5 million, $26.5 million, and $25.6 million as of July 28, 2024, July 30, 2023, and April 28, 2024, respectively.

These static levels of accounts payable reflect a consistent level of inventory of $41.7 million, $43.8 million, and $44.8 million as of July 28, 2024, July 30, 2023, and April 28, 2024, respectively.

Financing Arrangements

Currently, we have revolving credit agreements with banks for our U.S parent company and our operations located in China.

As of January 28, 2024, we did not have any outstanding borrowings associated with our revolving credit agreements.

As of July 28, 2024, we had outstanding borrowings totaling $4.0 million under a line of credit agreement associated with our operations located in China.

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants.

As of January 28, 2024, we were in compliance with these financial covenants.

As of July 28, 2024, we were in compliance with these financial covenants.

Refer to Note 10 of the consolidated financial statements for further disclosure regarding our revolving credit agreements.

Capital Expenditures and Depreciation

Capital expenditures on a cash basis during the first nine months of fiscal 2024 totaled $3.2 million and were mostly related to machinery and equipment associated with our mattress fabrics segment.

Capital expenditures on a cash basis during the first nine months of fiscal 2023 totaled $1.6 million and pertained to (i) manufacturing equipment associated with our mattress fabrics

segment, (ii) machinery and equipment associated with our former upholstery cut and sew operation located in Haiti;

and (iii) IT equipment associated with both our business segments.

Depreciation expense was $4.9 million during the first nine months of fiscal 2024, compared with $5.2 million for the same period a year ago.

Capital expenditures on a cash basis during the first quarter of fiscal 2025 totaled $501,000, compared with $513,000 during the first quarter of fiscal 2024.

This level of capital spending reflect the current unfavorable macro-economic conditions within the home furnishings and bedding industries.

Depreciation expense was $2.5 million during the first quarter of fiscal 2025, compared with $1.6 million for the same period a year ago.

Depreciation expense mostly related to our mattress fabrics segment for both periods.

For the remainder of fiscal 2024, our planned capital spending will be centered on our mattress fabrics segment, with a strategic focus on capital projects that will increase efficiencies and improve the quality of our products.

Funding for capital expenditures is expected to be from cash provided from operations.

In addition, during the three-month period ending July 28, 2024, depreciation expense for the mattress fabrics segment included $875,000 in additional depreciation expense related to the shortening of useful lives of equipment associated with our manufacturing facility located in Quebec, Canada.

This $875,000 of additional depreciation expense was classified as restructuring expense in the Consolidated Statement of Net Loss for the three-month period ending July 28, 2024.

For the remainder of fiscal 2025, our capital spending will be centered on our mattress fabrics segment, with a strategic focus on capital projects that will increase efficiencies and improve the quality of our products.

Funding for capital expenditures is expected to be from cash provided by operating activities.

Accounts Payable – Capital Expenditures

As of January 28, 2024, we had amounts due regarding capital expenditures totaling $19,000 that pertained to outstanding vendor invoices, none of which were financed.

As of July 28, 2024, we had amounts due regarding capital expenditures totaling $56,000 that pertained to outstanding vendor invoices, none of which were financed.

The total amount outstanding of $56,000 is required to be paid based on normal credit terms.

Purchase Commitments – Capital Expenditures

As of January 28, 2024, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $880,000.

As of July 28, 2024, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $275,000.

Critical Accounting Policies and Recent Accounting Developments

As of January 28, 2024, there were no changes in our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year ended April 30, 2023.

As of July 28, 2024, there were no changes in our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year ended April 28, 2024.

Refer to Note 2 of the consolidated financial statements for recently adopted and issued accounting pronouncements, if any, since the filing of our Form 10-K for the year ended April 28, 2024.

Contractual Obligations

There were no significant or new contractual obligations since those reported in our annual report on Form 10-K for the year ended April 30, 2023, except for those disclosed in Note 10 of the consolidated financial statements.

There were no significant or new contractual obligations since those reported in our annual report on Form 10-K for the year ended April 28, 2024.

Any significant increase in our raw material costs, utility/energy costs, and general economic inflation could have a material adverse impact on the company, because competitive conditions have limited our ability to pass significant operating cost increases on to customers.

During fiscal 2023 and continuing through the third quarter of fiscal 2024, raw material costs started to decline due to lower oil prices and slowing global demand;

however, higher cost of labor remained challenging during fiscal 2023 and continuing through the third quarter of fiscal 2024.

Inflationary pressures also affected consumer spending during fiscal 2023 and through the third quarter of fiscal 2024, causing a slowdown in business in both the mattress industry and the residential home furnishings industry.

This slowdown has caused reduced demand for our mattress fabrics and residential upholstery fabrics products during fiscal 2023 and during the first nine months of fiscal 2024.

During fiscal 2024 and continuing through the first quarter of fiscal 2025, raw material costs started to decline due to slowing global demand;

however, the cost of labor remained challenging during fiscal 2024 and continuing through the first quarter of fiscal 2025.

Inflationary pressures also affected consumer spending during fiscal 2024 and continued through the first quarter of fiscal 2025, causing a slowdown in business in both the mattress industry and the residential home furnishings industry.

This slowdown has caused reduced demand from producers of home furnishings for our mattress fabrics and residential upholstery fabrics products during fiscal 2024 and in the first quarter of fiscal 2025.

We are unable to predict how long these trends will last, or to what extent inflationary pressures may affect the economic and purchasing cycle for home furnishing products (and therefore affect demand for our products) over the short and long term.

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Interest Rates

We are exposed to market risk from changes in interest rates with regards to our revolving credit agreements.

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”) that established an asset-based revolving credit facility that required interest to be charged at a rate (applicable interest rate of 6.81% as of January 28, 2024) calculated using an applicable margin over the Federal Reserve Bank of New York’s secured overnight fund rate, as defined in the Amended Agreement.

As of January 28, 2024, there were no outstanding borrowings under the Amended Agreement.

Our revolving credit line associated with our operations located in China bears interest at a rate determined by the Chinese government at the time of borrowing.

As of January 28, 2024, there were no borrowings outstanding under our revolving credit agreement associated with our operations located in China.

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 July 28, 2024, was 6.84%.

As of July 28, 2024, there were no outstanding borrowings under the Amended Agreement.

Effective 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 (2.85% as of July 28, 2024).

There were outstanding borrowings under this agreement totaling $4.0 million as of July 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 July 28, 2024.

Foreign Currency

We are exposed to market risk from changes in the value of foreign currencies related to our subsidiaries domiciled in Canada and China.

We try to maintain a natural hedge by keeping a balance of our assets and liabilities denominated in the local currency of our subsidiaries domiciled in Canada and China.

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 United States dollar as their functional currency.

A substantial portion of the company’s imports purchased outside the United States are denominated in U.S.

A 10% change in the above exchange rates as of January 28, 2024, would not have materially affected our results of operations or financial position.

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.

A 10% change in the above exchange rates as of July 28, 2024, would not have materially affected our results of operations or financial position.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis