CULP INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes and other exhibits included elsewhere in this report. General Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30. The six months ended October 27, 2024, and October 29, 2023, both represent 26-week periods. Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. Mattress Fabrics The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. Currently, we have mattress fabric 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 10 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, 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 (established during the first quarter of fiscal 2025 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. Executive Summary We evaluate the operating performance of our business segments based upon (loss) income from operations before certain unallocated corporate expenses and other items that are not expected to occur on a regular basis. Cost of sales for each business segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished good purchases, direct and indirect labor, overhead, and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers and their support staff, all costs associated with being a public company, amortization of intangible assets, and other miscellaneous expenses. I- 34 Results of Operations Three Months Ended (dollars in thousands) October 27, 2024 October 29, 2023 Change Net sales $ 55,674 $ 58,725 (5.2)% Gross profit 5,990 7,950 (24.7)% Gross margin 10.8 % 13.5 % (270)bp Selling, general, and administrative expenses 9,359 10,045 (6.8)% Restructuring expense 2,031 144 N.M. Loss from operations (5,400 ) (2,239 ) 141.2% Operating margin (9.7 )% (3.8 )% (590)bp Loss before income taxes (5,694 ) (1,908 ) 198.4% Income tax benefit (expense) 50 (516 ) (109.7)% Net loss (5,644 ) (2,424 ) 132.8% Six Months Ended (dollars in thousands) October 27, 2024 October 29, 2023 Change Net sales $ 112,211 $ 115,387 (2.8)% Gross profit 11,066 15,035 (26.4)% Gross margin 9.9 % 13.0 % (310)bp Selling, general, and administrative expenses 18,655 19,874 (6.1)% Restructuring expense 4,662 482 N.M. Loss from operations (12,251 ) (5,321 ) 130.2% Operating margin (10.9 )% (4.6 )% (630)bp Loss before income taxes (12,715 ) (4,549 ) 179.5% Income tax expense (190 ) (1,217 ) (84.4)% Net loss (12,905 ) (5,766 ) 123.8% Net Sales Overall, our consolidated net sales for the second quarter of fiscal 2025 decreased by 5.2% compared with the same period a year ago, with mattress fabrics sales decreasing 4.2% and upholstery fabrics sales decreasing 6.4%. Our consolidated net sales for the first half of fiscal 2025 decreased by 2.8% compared with the same period a year ago, with mattress fabrics sale decreasing 4.0% and upholstery fabrics sales decreasing 1.3%. The decrease in net sales for our mattress fabrics segment for both the second quarter and the first half of fiscal 2025, as compared to the prior-year periods, reflects reduced demand as a result of weakness in the domestic mattress industry. The decrease in net sales for our upholstery fabrics segment for both the second quarter and the first half of fiscal 2025, as compared to the prior-year periods, reflects reduced demand for our residential upholstery fabric products due to weakness in the residential home furnishings industry. See the Segment Analysis section below for further details. Loss Before Income Taxes Overall, our loss before income taxes for the second quarter of fiscal 2025 was $(5.7) million, compared with loss before income taxes of $(1.9) million for the prior-year period, while our loss before income taxes for the first six months of fiscal 2025 was $(12.7) million, compared with loss before income taxes of $(4.5) million for the prior-year period. Operating performance for both the second quarter and the first half of fiscal 2025, as compared to the prior-year periods, was negatively affected by lower sales and by manufacturing inefficiencies primarily related to the significant restructuring activity underway in the mattress fabrics segment, along with restructuring and restructuring related charges during both periods ($2.8 million during the second quarter of fiscal 2025, as compared to $66,000 during the second quarter of fiscal 2024, and $5.5 million during the first half of fiscal 2025, as compared to $583,000 during the first half of fiscal 2024). See the Segment Analysis section below for further details. I- 35 Income Taxes We recorded income tax expense of $190,000, or (1.5%) of loss before income taxes, for the six-month period ended October 27, 2024, compared with income tax expense of $1.2 million, or (26.8%) of loss before income taxes, for the six-month period ended October 29, 2023. Our consolidated effective income tax rates for the first half of fiscal 2025 and the first half 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 half of fiscal 2025 and the first half of fiscal 2024, we incurred pre-tax losses associated with our U.S. operations, for which an income tax benefit was not recorded due to a full valuation allowance applied against our U.S. net deferred income tax assets. The income tax charge associated with the full valuation allowance applied against our U.S. net deferred income tax assets was higher during the first half of fiscal 2025 compared with the first half of fiscal 2024, as our $(12.4) million U.S. pre-tax loss incurred during the first half of fiscal 2025 was significantly greater than the $(5.8) million U.S. pre-tax loss incurred during the first half of fiscal 2024. During the first half of fiscal 2025, we incurred a greater consolidated pre-tax loss totaling $(12.7) million, compared with $(4.5) million during the first half 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 half of fiscal 2024, as compared with the first half of fiscal 2025. Refer to Note 15 of the consolidated financial statements for further details regarding our provision for income taxes. Liquidity As of October 27, 2024, our cash and cash equivalents (collectively, “cash”) totaled $10.5 million, which represents a slight increase 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 a line of credit associated with our operations located in China and 527,000 in cash proceeds from the sale of equipment associated with our restructuring activities, mostly offset by $1.6 million in capital expenditures and $2.6 million of net cash used in operating activities. Our net cash used in operating activities was $2.6 million during the first half of fiscal 2025, a decrease of $1.9 million compared with net cash used in operating activities of $4.5 million during the first half of fiscal 2024. This trend mostly reflects (i) an increase in accounts payable due to an increase in inventory purchases with significant vendors who extended their terms during the first half of fiscal 2025 compared with fiscal 2024, partially offset by (ii) an increase in inventory purchases to maintain an appropriate level of inventory during the company's restructuring activities, as described below in the section titled “—Segment Analysis—Mattress Fabrics Segment—Restructuring Activities,” and (iii) an increase in accounts receivable primarily due to an increase in net sales during the second quarter of fiscal 2025, as compared with the fourth quarter of fiscal 2024. As of October 27, 2024, we had outstanding borrowings totaling $4.1 million under a line of credit agreement associated with our operations located in China. Segment Analysis Mattress Fabrics Segment Three Months Ended (dollars in thousands) October 27, 2024 October 29, 2023 Change Net sales $ 30,074 $ 31,377 (4.2)% Gross profit 2,444 2,483 (1.6)% Gross profit margin 8.1 % 7.9 % 20bp Selling, general, and administrative expenses 3,481 3,419 1.8% Restructuring expense 2,002 — 100.0% Loss from operations (1,037 ) (936 ) 10.8% Operating margin (3.4 )% (3.0 )% (40)bp I- 36 Six Months Ended (dollars in thousands) October 27, 2024 October 29, 2023 Change Net sales $ 58,150 $ 60,599 (4.0)% Gross profit 2,118 4,477 (52.7)% Gross profit margin 3.6 % 7.4 % (380)bp Selling, general, and administrative expenses 6,704 6,811 (1.6)% Restructuring expense 4,501 — 100.0% Loss from operations (4,586 ) (2,334 ) 96.5% Operating margin (7.9 )% (3.9 )% (400)bp Net Sales Mattress fabrics sales decreased 4.2% in the second quarter of fiscal 2025 compared to the prior-year period. Mattress fabrics sales decreased 4.0% in the first half of fiscal 2025 compared to the first half of fiscal 2024. This decrease in net sales for our mattress fabrics segment for both the second quarter and the first half of fiscal 2025 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 first quarter of fiscal 2025, and we are making steady progress on the execution of this restructuring plan, which is expected to be mostly completed by the end of the third quarter of fiscal 2025. 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, as well as the potential impact of future tariffs, remain unknown and depend on factors beyond our knowledge or control. These situations could cause disruption to global markets or increased costs that could adversely affect our operations and financial performance. Gross Profit, Selling, General & Administrative Expenses, and Loss from Operations Loss from operations was $1.0 million for the second quarter of fiscal 2025, compared to loss from operations of $936,000 for the second quarter of fiscal 2024. Loss from operations was $4.6 million for the first half of fiscal 2025, compared to loss from operations of $2.3 million for the first half of fiscal 2024. Operating performance for both the second quarter and the first half of fiscal 2025, as compared to the prior-year periods, 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, partially offset by lower fixed costs. We expect manufacturing inefficiencies related our restructuring initiatives, as well as ongoing industry softness affecting sales volumes, will affect profitability through at least the third 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. I- 37 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; (2) move a portion of the knitting and finishing capacity from the company's manufacturing facility located in Quebec, Canada to the company's manufacturing facility located in Stokesdale, North Carolina; (3) transition the mattress fabrics segment's weaving operation to a strategic sourcing model through the company's long standing supply partners; and (4) consolidate the company's two leased facilities related to the sewn mattress cover operation 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 for the mattress segment of approximately $7.2 million during fiscal 2025, of which approximately $4.3 million is expected to be cash expenditures. The $7.2 million of estimated restructuring and restructuring related charges associated with our mattress fabrics segment represents (i) other associated costs of $2.7 million mostly related to relocating equipment from our facility in Quebec, Canada to our facility in Stokesdale, NC, (ii) additional depreciation expense related to the shortening of useful lives of equipment associated with the gradual discontinuance of our operations located in Canada noted above totaling $1.3 million, (iii) employee termination benefits of $1.3 million, (iv) $1.1 million related to losses on disposal and valuation of inventory, and (v) lease termination costs of $860,000, (vi) partially offset by net gains on the disposal of equipment totaling $110,000. 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 cash 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 October 27, 2024: Three Months Ended Six Months Ended (dollars in thousands) October 27, 2024 October 27, 2024 Additional depreciation expense for shortened useful lives of equipment $ 465 $ 1,340 Employee termination benefits 563 1,150 Lease termination costs 179 849 Other Associated Costs 900 1,172 Loss on disposal and markdowns of inventory 769 885 Net gain on disposal of equipment (105 ) (10 ) Restructuring expense and restructuring related charges (1) (2) $ 2,771 $ 5,386 (1) Of the total $2.8 million restructuring and restructuring related charges, $2.0 million and $769,000 were classified within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month period ending October 27, 2024. (2) Of the total $5.4 million restructuring and restructuring related charges, $4.5 million and $885,000 were classified within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the six-month period ending October 27, 2024. Refer to Note 10 of the consolidated financial statements for further details. I- 38 Segment assets Segment assets consist of accounts receivable, inventory, property, plant, and equipment, right of use assets, and assets held for sale : (dollars in thousands) October 27, 2024 October 29, 2023 April 28, 2024 Accounts receivable $ 10,352 $ 11,303 $ 10,003 Inventory 29,253 27,195 27,671 Property, plant & equipment 24,702 32,862 31,472 Right of use assets 275 1,969 1,627 Assets held for sale 3,301 — — $ 67,883 $ 73,329 $ 70,773 Refer to Note 14 of the consolidated financial statements for disclosures regarding determination of our segment assets. Accounts Receivable As of October 27, 2024, accounts receivable decreased by $951,000, or 8.4%, compared with October 29, 2023. This reflects the 4.2% decrease in net sales during the second quarter of fiscal 2025, as compared to the second quarter of fiscal 2024. In addition, the decrease in accounts receivable was due to improved payment trends with larger customers during the second quarter of fiscal 2025, compared with the second quarter of fiscal 2024. Accordingly, days’ sales outstanding decreased to 31 days for the second quarter of fiscal 2025, as compared to 33 days for the second quarter of fiscal 2024. As of October 27, 2024, accounts receivable remained flat compared with April 28, 2024. This trend primarily reflects an increase in net sales for the second quarter of fiscal 2025, as compared to the fourth quarter of fiscal 2024, offset by faster cash collections, as we experienced improved payment trends with larger customers during the second quarter of fiscal 2025 compared to the second quarter of fiscal 2024. Net sales for the second quarter of fiscal 2025 were $30.1 million, an increase of 16.8%, compared with net sales of $25.8 million during the fourth quarter of fiscal 2024. Days’ sales outstanding decreased to 31 days for the first quarter of fiscal 2025, as compared to 35 days for the fourth quarter of fiscal 2024. Inventory As of October 27, 2024, inventory increased by $2.1 million, or 7.6%, compared with October 29, 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 October 27, 2024, inventory increased by $1.6 million, or 5.7%, compared with April 28, 2024. This increase in inventory represents an increase in net sales of $4.3 million, or 16.8%, during the second quarter of fiscal 2025, as compared with the fourth quarter of fiscal 2024. This trend is also due to the effect of the restructuring activity described in the preceding paragraph. Inventory turns were 4.1 for the second quarter of fiscal 2025, as compared with 4.5 for the second quarter of fiscal 2024 and 3.6 for the fourth quarter of fiscal 2024. Property, Plant, & Equipment During fiscal 2024 and continuing through the second 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 $24.7 million as of October 27, 2024, represents property, plant, and equipment of $22.2 million, $1.6 million, and $889,000 located in the U.S., Canada, and Haiti, respectively. The $32.9 million as of October 29, 2023, represents property, plant, and equipment of $22.2 million, $10.0 million, and $661,000 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. I- 39 Right of Use Assets During fiscal 2024 and continuing through the second 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 $275,000 as of October 27, 2024, represents a right of use asset in Haiti. The $2.0 million as of October 29, 2023, represents right of use assets of $1.3 million and $663,000 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 October 27, 2024, and in connection with actions described above in “Restructuring Activities,” we classified certain equipment relating to both our U.S. and Canadian operations and our building located in Quebec, Canada, as held for sale. The $3.3 million represents assets held for sale of $2.9 million and $358,000 located in Canada and the U.S., respectively. Refer to Note 8 of the consolidated financial statements for further details. Upholstery Fabrics Segment Net Sales Three Months Ended (dollars in thousands) October 27, 2024 October 29, 2023 % Change Non-U.S. Produced $ 22,372 87 % $ 24,129 88 % (7.3 )% U.S. Produced 3,228 13 % 3,219 12 % 0.3 % Total $ 25,600 100 % $ 27,348 100 % (6.4 )% Six Months Ended (dollars in thousands) October 27, 2024 October 29, 2023 % Change Non-U.S. Produced $ 47,709 88 % $ 48,762 89 % (2.2 )% U.S. Produced 6,352 12 % 6,026 11 % 5.4 % Total $ 54,061 100 % $ 54,788 100 % (1.3 )% Upholstery fabrics sales decreased 6.4% in the second quarter of fiscal 2025 compared to the prior-year period. Upholstery fabrics sales decreased 1.3% in the first half of fiscal 2025 compared to the first half of fiscal 2024. The decrease in net sales for our upholstery fabrics segment for both the second quarter and the first half of fiscal 2025 reflects reduced demand for our residential upholstery fabric products as compared to the prior-year periods. This reduced demand was driven primarily by ongoing weakness in the residential home furnishings industry, including increased weakness during the second quarter which resulted in lower order levels as many customers, including a significant customer, adjusted their inventory positions to align with industry softness. Net sales for our hospitality/contract fabrics for both the second quarter and the first half of fiscal 2025 were relatively flat compared to the prior-year periods. Looking ahead, we expect the lower customer order levels noted above will pressure residential fabric sales during the third quarter of fiscal 2025 as some customers continue to adjust inventory positions. We also expect the soft industry demand backdrop for residential home furnishings may affect our residential business for some period of time. Despite these challenges, 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/commercial business. Notably, the potential ongoing geopolitical disruptions related to wars in Ukraine and the Middle East, as well as the potential impact of future tariffs, remain unknown and depend on factors beyond our control. At this time, we cannot reasonably estimate the impact of these items 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, or if new tariffs are imposed on our products, the impact on our operations, and/or on our suppliers, customers, consumers, and the global economy, could adversely affect our financial performance. I- 40 Gross Profit, Selling, General & Administrative Expenses, and Income from Operations Three Months Ended (dollars in thousands) October 27, 2024 October 29, 2023 Change Gross profit $ 4,315 $ 5,389 (19.9)% Gross margin 16.9 % 19.7 % (280)bp Selling, general, and administrative expenses 3,700 3,998 (7.5)% Restructuring expense 29 144 (79.9)% Income from operations 615 1,391 (55.8)% Operating margin 2.4 % 5.1 % (270)bp Six Months Ended (dollars in thousands) October 27, 2024 October 29, 2023 Change Gross profit $ 9,833 $ 10,659 (7.7)% Gross margin 18.2 % 19.5 % (130)bp Selling, general, and administrative expenses 7,506 7,939 (5.5)% Restructuring expense 161 482 (66.6)% Income from operations 2,327 2,720 (14.4)% Operating margin 4.3 % 5.0 % (70)bp Income from operations was $615,000 for the second quarter of fiscal 2025, compared to income from operations of $1.4 million for the second quarter of fiscal 2024. Income from operations was $2.3 million for the first half of fiscal 2025, compared to income from operations of $2.7 million for the first half of fiscal 2024. The decrease in upholstery fabrics profitability for the second quarter and the first half of fiscal 2025, as compared to the prior-year periods, primarily reflects lower sales; higher inventory markdown expense during the second quarter (as compared with especially low inventory markdown expense during the prior-year period); a less favorable foreign exchange rate associated with this segment's operations in China; and higher freight costs. These factors were offset somewhat by lower SG&A expense and lower fixed costs during both periods. 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 is allowing 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 I- 41 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 one facility, and in turn moved the production of upholstery cut and sewn kits to another existing facility leased by Culp Home Fashions Haiti, Ltd. ("CHF Haiti") during the fourth quarter of fiscal 2023. Both CUF Haiti and CHF Haiti are indirectly wholly owned 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 sewn kits in Haiti. This restructuring activity was completed during the third quarter of fiscal 2024 and resulted in 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 October 27, 2024, and October 29, 2023: (1) (2) Three Months Ended Three Months Ended (dollars in thousands) October 27, 2024 October 29, 2023 Employee termination benefits $ — $ 2 Impairment loss - equipment — 142 Other associated costs 29 — Gain on disposal and markdowns of inventory — (78 ) Restructuring expense and restructuring related charges (3) (4) $ 29 $ 66 (1) The $29,000 affected our U.S. upholstery fabrics operations and related to cost reductions under the Fiscal 2025 Restructuring Plan, which are described in Note 10 of the consolidated financial statements. (2) The total $66,000 related to the closure of our upholstery cut and sewn kits operation located in Ouanaminthe, Haiti, as described above. (3) The total $29,000 was recorded within restructuring expense in the Consolidated Statement of Net Loss for the three-month period ending October 27, 2024. (4) Of the $66,000 total, $144,000 and $(78,000) were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month period ending October 29, 2023. The following summarizes our restructuring expense and restructuring related charges for all restructuring activities for the upholstery fabrics segment for the six-months ending October 27, 2024, and October 29, 2023: (1) (2) Six Months Ended Six Months Ended (dollars in thousands) October 27, 2024 October 29, 2023 Employee termination benefits $ 102 $ 103 Impairment loss - equipment — 379 Other associated costs 59 — Loss on disposal and markdowns of inventory — 101 Restructuring expense and restructuring related (credits) charges (3) (4) $ 161 $ 583 I- 42 (1) Of the $161,000, $147,000 affected our U.S. upholstery fabrics operations and related cost reductions under the Fiscal 2025 Restructuring Plan, which are described in Note 10 of the consolidated financial statements. In addition, the $161,000 includes $14,000 related to the rationalization of our upholstery fabrics finishing operation located in Shanghai, China, as described above. (2) The total $583,000 related to the closure of our upholstery cut and sewn kits operation located in Ouanaminthe, Haiti, as described above. (3) The total $161,000 was recorded within restructuring expense in the Consolidated Statement of Net Loss for the six-month period ending October 27, 2024. (4) Of the $583,000 total, $482,000 and $101,000 were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the six-month period ending October 29, 2023. Segment Assets Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets: (dollars in thousands) October 27, 2024 October 29, 2023 April 28, 2024 Accounts receivable $ 11,978 $ 11,733 $ 11,135 Inventory 15,879 17,270 17,172 Property, plant & equipment 1,188 1,175 1,125 Right of use assets 1,120 1,992 1,952 $ 30,165 $ 32,170 $ 31,384 Refer to Note 14 of the consolidated financial statements for disclosures regarding determination of our segment assets. Accounts Receivable As of October 27, 2024, accounts receivable increased slightly as compared with October 29, 2023. This trend reflects slower cash collections due to an unfavorable mix of customers with longer payment cycles during the second quarter of fiscal 2025, as compared to the prior-year period. As a result, days’sales outstanding for this segment increased to 39 days for the second quarter of fiscal 2025, compared with 36 days for the second quarter of fiscal 2024. However, the increase in accounts receivable from slower cash collections was partially offset by a decrease in net sales of $1.7 million, or 6.4%, during the second quarter of fiscal 2025, as compared to the second quarter of fiscal 2024. As of October 27, 2024, accounts receivable increased by $843,000, or 7.6%, compared with April 28, 2024. This trend reflects an increase in net sales of $1.8 million, or 7.7%, during the second quarter of fiscal 2025, as compared to the fourth quarter of fiscal 2024. Net sales for the second quarter of fiscal 2025 were $25.6 million, an increase of $1.8 million, or 7.7%, compared with net sales of $23.8 million for the fourth quarter of fiscal 2024. Also, the increase in accounts receivable was attributable to slower cash collections as noted in the preceding paragraph during the second quarter of fiscal 2025, as compared to the fourth quarter of fiscal 2024. As a result, days’sales outstanding for this segment increased to 39 days for the second quarter of fiscal 2025, compared with 37 days for the fourth quarter of fiscal 2024. Inventory As of October 27, 2024, inventory decreased by $1.4 million, or 8.1%, compared with October 29, 2023. This decrease in inventory primarily represents the decrease in net sales during the second quarter of fiscal 2025, compared with the prior-year period, as described in the above section titled "Segment Analysis-Upholstery Fabrics-Net Sales." As of October 27, 2024, inventory decreased by $1.3 million, or 7.5%, compared with April 28, 2024. Although net sales for the second quarter of fiscal 2025 increased by $1.8 million, or 7.7%, compared with the fourth quarter of fiscal 2024, this decrease in inventory reflects management's ability to maintain appropriate levels of inventory, taking into account current and expected future demand trends and any changes in our global supply chain. Inventory turns were 5.1 for the second quarter of fiscal 2025, compared with 4.6 for the second quarter of fiscal 2024 and 4.4 for the fourth quarter of fiscal 2024. I- 43 Property, Plant, & Equipment As of October 27, 2024, property, plant, and equipment remained relatively flat compared with October 29, 2023, and April 28, 2024, respectively. This trend is mainly due to a reduced level of capital spending commensurate with current unfavorable macro-economic conditions within the home furnishings industry. The $1.2 million as of October 27, 2024, represents property, plant, and equipment of $1.1 million and $95,000 located in the U.S. and China, respectively. The $1.2 million as of October 29, 2023, represents property, plant, and equipment of $1.0 million and $140,000 located in the U.S. 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 October 27, 2024, right of use assets steadily decreased compared with October 29, 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 $1.1 million as of October 27, 2024, represents right of use assets of $925,000 and $195,000 located in the U.S. and China, respectively. The $2.0 million as of October 29, 2023, represents right of use assets of $1.2 million and $818,000 located in China and the U.S., respectively. The $2.0 million as of April 28, 2024, represents right of use assets of $1.3 million and $709,000 located in China and the U.S., respectively. Other Income Statement Categories Three Months Ended (dollars in thousands) October 27, 2024 October 29, 2023 % Change SG&A expenses $ 9,359 $ 10,045 (6.8 )% Interest expense 30 — 100.0 % Interest income 244 282 (13.5 )% Other expense (income) 508 (49 ) N.M. Six Months Ended (dollars in thousands) October 27, 2024 October 29, 2023 % Change SG&A expenses $ 18,655 $ 19,874 (6.1 )% Interest expense 58 — 100.0 % Interest income 507 627 (19.1 )% Other expense (income) 913 (145 ) N.M. Selling, General, and Administrative Expenses ("SG&A") The decrease in selling, general, and administrative expenses during the second quarter and first half of fiscal 2025, as compared to the second quarter and first half of fiscal 2024, is primarily due to (i) lower incentive compensation that mostly relates to annual bonuses reflecting unfavorable financial results in relation to pre-established performance targets; (ii) lower employee compensation due to the company's restructuring activities described in the section titled "- Segment Analysis-Mattress Fabrics Segment-Restructuring Activities"; and (iii) lower professional and consulting fees. Interest Expense Interest expense represents our borrowings totaling $4.1 million under a line of credit agreement associated with our operations located in China. Interest Income The decreases in interest income are due to lower average cash balances during the first two quarters of fiscal 2025, as compared to the first two quarters of fiscal 2024. Other (Expense) Income I- 44 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, Canada, and Vietnam. The change in other expense during the second quarter and first half of fiscal 2025, as compared to other income during the second quarter and first half 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 second quarter and first half of fiscal 2025, as compared to the prior-year periods. During the second quarter of fiscal 2025, we reported a foreign currency exchange loss associated with our operations located in China totaling $186,000, compared with a foreign currency exchange gain of $228,000 during the second quarter of fiscal 2024. During the first half of fiscal 2025, we reported a foreign currency exchange loss associated with our operations located in China totaling $231,000, compared with a foreign currency exchange gain of $679,000 during the first half of fiscal 2024. The $231,000 foreign currency exchange loss related to our operations in China was mostly non-cash and was partially offset by $221,000 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. parent. The income tax benefit of $221,000 was associated with deductible 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 (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. Income Taxes Effective Income Tax Rate We recorded income tax expense of $190,000, or (1.5%) of loss before income taxes, for the six-month period ending October 27, 2024, compared with income tax expense of $1.2 million, or (26.8%) of loss before income taxes, for the six-month period ending October 29, 2023. Our effective income tax rates for the six-month periods ended October 27, 2024, and October 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 six-month periods ended October 27, 2024, and October 29, 2023, we were subject to loss limitation rules. These loss limitation rules require any taxable loss associated with our U.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it was determined that no income tax benefit could be recognized during the current fiscal year. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China, Canada, Haiti, and Vietnam versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar. The following schedule summarizes the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements for the six-month periods ending October 27, 2024, and October 29, 2023: October 27, October 29, 2024 2023 U.S. federal income tax rate 21.0 % 21.0 % U.S. valuation allowance (18.8 ) (32.8 ) Tax effects of local currency foreign exchange (losses) gains (4.5 ) 5.1 Uncertain income tax positions 2.6 (0.1 ) Withholding taxes associated with foreign jurisdictions (0.7 ) (9.9 ) Foreign income tax rate differential — (5.7 ) Stock-based compensation (0.4 ) (4.2 ) Other (0.7 ) (0.2 ) (1.5)% (26.8)% Our consolidated effective income tax rates for the first half of fiscal 2025 and the first half 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 half of fiscal 2025 and the first half of 2024, we incurred pre-tax losses associated with our U.S. operations, for which an income tax benefit was not recorded due to a full valuation allowance applied against our U.S. net deferred income tax assets. The income tax charge associated I- 45 with the full valuation allowance applied against our U.S. net deferred income tax assets was higher during the first half of fiscal 2025 compared with the first half of fiscal 2024, as our $(12.4) million U.S. pre-tax loss incurred during the first half of fiscal 2025 was significantly greater than the $(5.8) million U.S. pre-tax loss incurred during the first half of fiscal 2024. During the first half of fiscal 2025, we incurred a greater consolidated pre-tax loss totaling $(12.7) million, compared with $(4.5) million during the first half 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 half of fiscal 2024, as compared with the first half of fiscal 2025. U.S. Valuation Allowance We evaluate the realizability of our U.S. net deferred income tax assets to determine if a valuation allowance is required. We assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law. As of October 27, 2024, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was required. Based on our assessment, we determined we still have a recent history of significant cumulative U.S. pre-tax losses, in that we experienced U.S. pre-tax losses during each of the last three fiscal years from 2022 through 2024, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal 2025. As a result of the significant weight of this negative evidence, we believe it is more likely than not that our U.S. deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets. Based on our assessments as of October 27, 2024, October 29, 2023, and April 28, 2024, valuation allowances against our net deferred income tax assets pertain to the following: (dollars in thousands) October 27, 2024 October 29, 2023 April 28, 2024 U.S. federal and state net deferred income tax assets $ 22,060 $ 17,839 $ 19,674 U.S. capital loss carryforward 2,330 2,330 2,330 $ 24,390 $ 20,169 $ 22,004 Undistributed Earnings We assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company and whether we are required to record a deferred income tax liability for those undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. As of October 27, 2024, we assessed the liquidity requirements of our U.S. parent company and determined that our undistributed earnings and profits from our foreign subsidiaries would not be reinvested indefinitely and would eventually be distributed to our U.S. parent company. The conclusion reached from this assessment was consistent with prior reporting periods. As a result of the 2017 Tax Cuts and Jobs Act, a U.S. corporation is allowed a 100% dividend received deduction for earnings and profits received from a 10% owned foreign corporation. Therefore, a deferred income tax liability will be required only for unremitted withholding taxes associated with earnings and profits generated by our foreign subsidiaries that will ultimately be repatriated to the U.S. parent company. As a result, as of October 27, 2024, October 29, 2023, and April 28, 2024, we recorded a deferred income tax liability of $5.0 million, $4.6 million, and $4.8 million, respectively. Uncertain Income Tax Positions An unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the end of the reporting period, or is effectively settled through examination, negotiation, or litigation, or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time. I- 46 As of October 27, 2024, October 29, 2023, and April 28, 2024, we had a $1.4 million, $1.2 million, and $1.3 million total of gross unrecognized income tax benefits, of which the entire amount was classified as income taxes payable – long-term in the accompanying Consolidated Balance Sheets. As of October 27, 2024, the unrecognized tax benefit would favorably affect income tax expense in future periods by $1.4 million. Our gross unrecognized income tax benefit of $1.4 million as of October 27, 2024, relates to income tax positions for which significant change could occur within the next year if the statute of limitations for relevant taxing authorities to examine and challenge the tax position expires. Income Taxes Paid The following table sets forth taxes paid by jurisdiction: Six Months Six Months Ended Ended October 27, October 29, (dollars in thousands) 2024 2023 United States Transition Tax Payment 665 499 China Income Taxes, Net of Refunds 578 1,278 Canada - Income Taxes, Net of Refunds — 336 $ 1,243 $ 2,113 Future Liquidity 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 2025 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. parent; and (iii) the respective tax rates that will be applied on the sale of 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 $1.7 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. parent. 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 totaling $69.6 million as of April 28, 2024. As of October 27, 2024, we will be required to pay a U.S. federal transition tax payment, in accordance with the 2017 Tax Cuts and Jobs Act of $831,000 by August 15, 2025. Liquidity and Capital Resources Liquidity Overall Currently, our sources of liquidity include cash and cash equivalents (collectively, "cash"), cash flow from operations, and amounts available under our revolving credit lines. As of October 27, 2024, we believe our cash of $10.5 million and the current availability under our revolving credit lines totaling $22.6 million will be sufficient to fund our foreseeable business needs, restructuring activities, capital expenditures, commitments, and contractual obligations. Refer to Note 11 of the consolidated financial statements for further information regarding our revolving credit lines. As of October 27, 2024, our cash totaled $10.5 million, which represents a slight increase 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 a line of credit associated with our operations located in China and $527,000 in cash proceeds from the sale of equipment associated with our restructuring activities, mostly offset by $1.6 million in capital expenditures and $2.6 million of net cash used in operating activities. I- 47 Our net cash used in operating activities was $2.6 million during the first half of fiscal 2025, a decrease of $1.9 million compared with net cash used in operating activities of $4.5 million during the first half of fiscal 2024. This trend mostly reflects (i) an increase in accounts payable due to an increase in inventory purchases from significant vendors who extended their terms during the first half of fiscal 2025 compared with fiscal 2024, partially offset by (ii) an increase in inventory purchases to maintain an appropriate level of inventory during the company's recent restructuring activities, as described above in the section titled “—Segment Analysis—Mattress Fabrics Segment—Restructuring Activities,” and (iii) an increase in accounts receivable primarily due to an increase in net sales during the second quarter of fiscal 2025, as compared to the fourth quarter of fiscal 2024. As of October 27, 2024, we had outstanding borrowings totaling $4.1 million under a line of credit agreement associated with our operations located in China. The income taxes we pay also affect our liquidity. See the above section titled “ Income Taxes Paid ” for further detail. 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 the Middle East), and (v) the continuing uncertainty associated with COVID-19. These factors could cause delays in receipt of payment on accounts receivable and could increase cash disbursements due to rising prices. By Geographic Area A summary of our cash by geographic area follows: October 27, October 29, April 28, (dollars in thousands) 2024 2023 2024 United States $ 1,189 $ 5,047 $ 2,912 China 9,102 9,301 6,554 Canada 49 482 371 Haiti 142 375 86 Vietnam 41 — 81 Cayman Islands 8 9 8 $ 10,531 $ 15,214 $ 10,012 Common Stock Repurchase Program In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased and the timing of such purchases are based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities. We did not repurchase any shares of common stock during the six month periods ending October 27, 2024, or October 29, 2023, respectively. As of October 27, 2024, $3.2 million is available for additional repurchases of our common stock. Dividends 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 second 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 $33.4 million as of October 27, 2024, compared with $38.4 million as of October 29, 2023, and $38.5 million as of April 28, 2024. Operating working capital turnover was 6.0 during the second quarter of fiscal 2025, compared with 5.5 during the second quarter of fiscal 2024 and 5.8 during the fourth quarter of fiscal 2024. I- 48 Accounts Receivable Accounts receivable was $22.3 million as of October 27, 2024, a decrease of $706,000, or 3.1%, compared with $23.0 million as of October 29, 2023. This trend was mostly due to a 5.2% decrease in consolidated nets sales during the second quarter of fiscal 2025, as compared to the second quarter of fiscal 2024. Days’ sales outstanding were 35 days for the second quarter of fiscal 2025, and were slightly higher compared with 34 days for the second quarter of fiscal 2024. Accounts receivable as of October 27, 2024, increased $1.2 million, or 5.6%, compared with $21.1 million as of April 28, 2024. This trend was due to a 12.4% increase in net sales during the second quarter of fiscal 2025, as compared to the fourth quarter of fiscal 2024. However, this increase in accounts receivable was partially offset by faster cash collections stemming from improved payment trends with larger customers associated with our mattress fabrics segment during the second quarter of fiscal 2025, compared with the fourth quarter of fiscal 2024. As a result, days’ sales outstanding decreased to 35 days for the second quarter of fiscal 2025, compared with 36 days for the fourth quarter of fiscal 2024. Inventory Inventory was $45.1 million as of October 27, 2024, and was comparable to $44.5 million and $44.8 million as of October 29, 2023, and April 28, 2024, respectively. This trend represents management's ability to maintain an appropriate level of inventory during the company's recent restructuring plan as described above in the section titled “—Segment Analysis — Mattress Fabrics Segment — Restructuring Activities,” and taking into account current and expected future demand trends and any changes in our global supply chain. Inventory turns were 4.5 for the second quarter of fiscal 2025, as compared with 4.6 for the second quarter of fiscal 2024 and 3.9 for the fourth quarter of fiscal 2024. Accounts Payable - Trade As of October 27, 2024, accounts payable - trade was $32.4 million, which represents a significant increase compared with $27.9 million and $25.6 million as of October 29, 2023, and April 28, 2024, respectively. This trend mostly represents an increase in inventory purchases from significant vendors who extended credit terms during the second quarter of fiscal 2025, as compared with the second quarter of fiscal 2024 and the fourth quarter of fiscal 2024. Financing Arrangements Currently, we have revolving credit agreements with banks for our U.S parent company and our operations located in China. As of October 27, 2024, we had outstanding borrowings totaling $4.1 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 October 27, 2024, we were in compliance with these financial covenants. Refer to Note 11 of the consolidated financial statements for further disclosure regarding our revolving credit agreements. Capital Expenditures and Depreciation Overall Capital expenditures on a cash basis during the first half of fiscal 2025 totaled $1.6 million, compared with $2.0 million during the first half of fiscal 2024. This level of capital spending reflects reduced capital spending during the current unfavorable macro-economic conditions within the home furnishings and bedding industries. Depreciation expense was $4.4 million for the first half of fiscal 2025, compared with $3.3 million for the same period a year ago, and was mostly related to our mattress fabrics segment for both periods. In addition, for the first half of fiscal 2025, depreciation expense for the mattress fabrics segment included $1.3 million of additional depreciation expense related to the shortening of useful lives of equipment associated with our manufacturing facility located in Quebec, Canada. This $1.3 million of additional I- 49 depreciation expense was classified as restructuring expense in the Consolidated Statement of Net Loss for the six-month period ending October 27, 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 October 27, 2024, we had amounts due regarding capital expenditures totaling $602,000 that pertained to outstanding vendor invoices, none of which were financed. The total amount outstanding of $602,000 is required to be paid based on normal credit terms. Purchase Commitments – Capital Expenditures As of October 27, 2024, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $571,000. Critical Accounting Policies and Recent Accounting Developments As of October 27, 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 28, 2024. Inflation Any significant increase in our raw material costs, utility/energy costs, and general economic inflation could have a material adverse impact on the company, because competitive conditions have limited our ability to pass significant operating cost increases on to customers. During fiscal 2024 and continuing through the second 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 second quarter of fiscal 2025. Inflationary pressures also affected consumer spending during fiscal 2024 and continuing through the second 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 second 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. I- 50 ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK Interest Rates We are exposed to market risk from changes in interest rates on our revolving credit agreements. Effective January 19, 2023, we entered into a second amended and restated U.S. revolving credit agreement (the "Amended Agreement") to establish an asset-based revolving credit facility that required interest to be charged at a rate calculated using an applicable margin over Federal Reserve Bank of New York's secured overnight fund rate (SOFR), as defined in the Amended Agreement. The interest rate under the Amended Agreement as of October 27, 2024, was 6.33%. As of October 27, 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 (2.60% as of October 27, 2024). There were outstanding borrowings under this agreement totaling $4.1 million as of October 27, 2024. On November 5, 2024, we entered into an unsecured credit agreement with another 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 (2.60% as of October 27, 2024). There were no outstanding borrowings under this agreement as of October 27, 2024. Foreign Currency We are exposed to market risk from changes in the value of foreign currencies for our subsidiaries domiciled in Canada, China, and Vietnam. We try to maintain a natural hedge by keeping a balance of our assets and liabilities denominated in the local currency of our subsidiaries domiciled in Canada, China, and Vietnam. However, there is no assurance that we will be able to continually maintain this natural hedge. Our foreign subsidiaries use the U.S. dollar as their functional currency. A substantial portion of the company’s imports purchased outside the U.S. are denominated in U.S. dollars. A 10% change in the above exchange rates as of October 27, 2024, would not have materially affected our results of operations or financial position.