What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-07-11 compared with 2024-07-12 · 280 added, 250 removed, 253 unchanged (68% of the section changed)

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Fiscal 2025, 2024, and 2023 each included 52- weeks periods.

Our operations are classified into two business segments:

We refer to the year ended April 27, 2025 as “fiscal 2025,” the year ended April 28, 2024 as “fiscal 2024” and the year ended April 30, 2023 as “fiscal 2023.”

Our operations are classified into two reportable segments:

mattress fabrics and upholstery fabrics.

On April 24, 2025, the company announced a strategic transformation of its operating model that will combine certain activities within the mattress fabrics and upholstery fabrics business segments and become a more integrated Culp-branded business.

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.

During the last half of fiscal 2023, we rationalized our domestic cut and sewn cover platform, which included the termination of agreements to lease two facilities located in High Point, North Carolina, and moving our R&D and prototyping capabilities from these facilities to our facility located in Stokesdale, North Carolina.

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;

Currently, we have a mattress fabric manufacturing operation located in Stokesdale, North Carolina, and a sewn mattress cover operation located in Ouanaminthe, Haiti.

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 the closure and sale of the company's manufacturing facility and related land (collectively referred to as the "Property") located in Quebec, Canada;

(2) move a portion of the knitting and finishing capacity from the 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 operation expenses at this location.

See Note 8 to the consolidated statements regarding our restructuring activities.

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 to the consolidated financial statements for further details regarding the restructuring activities announced on May 1, 2024.

All the above restructuring activities related to the May 1, 2024, announcement have been completed, including the sale of the Property located in Quebec, Canada, effective April 30, 2025.

See Note 8 located in the notes to the consolidated financial statements for further details regarding the sale of the Property.

During the last half of fiscal 2023, we rationalized our domestic cut and sewn cover platform, which included the termination of agreements to lease two facilities located in High Point, North Carolina, and moved our R&D and prototyping capabilities from these facilities to our facility located in Stokesdale, North Carolina.

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 also established a wholly owned subsidiary, Culp Fabrics Vietnam Limited, with an administrative office located in Ho Chi Minh City, Vietnam, for the purpose of enhancing our strategic sourcing opportunities and to further diversify our supply chain in Asia.

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

However, due to a significant 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 sewn 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 first quarter of fiscal 2024 as a result of a further decline in demand.

See Notes 8 and 9 of the consolidated financial statements for further details regarding this restructuring plan.

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

As of April 27, 2025, we had 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 capabilities and to further diversify our supply chain in Asia.

On April 24, 2025, we announced as part of our strategic transformation noted above, that we will close our leased facility located in Burlington, North Carolina, and transition its production and distribution activities utilizing a shared management model within our owned facility located in Stokesdale, North Carolina.

Our Stokesdale, North Carolina facility has historically been solely operated by our mattress fabrics segment.

We expect this transition to be substantially completed by December 31, 2025.

During fiscal 2023, Culp Upholstery Fabrics - Haiti, Ltd.

entered into an agreement to terminate a lease agreement for a facility located in Ouanaminthe, Haiti, and relocated a scaled down upholstery cut and sewn kits operation into our existing mattress cover facility also located in Ouanaminthe, Haiti.

During the first quarter of fiscal 2024, demand for upholstery cut and sewn kits declined more than

previously anticipated, resulting in a strategic action to discontinue production of upholstery cut and sewn kits in Haiti.

See Note 10 of the consolidated financial statements for further details regarding this restructuring plan.

Additionally, Read Window Products, LLC (“Read”), a wholly owned subsidiary with operations located in Knoxville, Tennessee, and our upholstery fabrics facility located in Burlington, North Carolina, provide window treatments and sourcing of upholstery fabrics and other products, as well as related measuring and installation services to customers in the hospitality and commercial markets.

Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows.

The activities located at our Burlington, North Carolina, facility will transition to our facility located in Stokesdale, North Carolina, as part of our integration and shared management initiative noted above.

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.

Our Chief Operating Decision Maker ("CODM") is our Chief Executive Officer ("CEO"), who regularly reviews the financial results of the company on a consolidated and business segment basis for the purpose of evaluating financial and operating performance, allocation of resources to the individual segments noted above, and determining executive compensation.

Accordingly, our CODM reviews certain financial metrics that include net sales and (loss) income from operations before unallocated corporate expenses and other items that are not expected to occur on a regular basis (i.e., restructuring activities), as well as (i) cost of sales, (ii) gross profit, (iii) selling, general, and administrative expenses, including unallocated corporate expenses, (iv) assets used in operations, which generally include accounts receivable, inventory, property, plant, and equipment, right of use assets, and assets held for sale;

and (v) capital spending.

Cost of sales for each segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead, and incoming freight charges.

Unallocated corporate expenses primarily represent compensation and benefits for certain executives and their support staff, all costs associated with being a public company, amortization of intangible assets, and other miscellaneous expenses.

Results of Operations

Consolidated Results of Operations

Twelve Months Ended

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Income tax expense

Our consolidated net sales decreased 4.1% in fiscal 2024 compared with a year ago, with mattress fabric net sales increasing 4.8% and upholstery fabric net sales decreasing 12.1%.

The increase in net sales in our mattress fabrics segment was driven by higher sales for the first nine months of fiscal 2024, primarily due to new fabric and sewn cover placements 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 higher sales in the first nine months of the year were partially offset by lower sales during the fourth quarter, as sales were pressured by weakness in the domestic mattress industry, driven by a challenging macroeconomic environment that affected consumer discretionary spending and housing markets.

The decrease in net sales for our upholstery fabrics segment for fiscal 2024 primarily reflects ongoing softness in the residential home furnishings industry, where demand was pressured throughout the year by a challenging macroeconomic environment that affected consumer discretionary spending and reduced home sales.

Our consolidated net sales decreased by 5.4% in fiscal 2025 compared with a year ago, with mattress fabric net sales decreasing 2.1% and upholstery fabric net sales decreasing 8.8%.

The decrease in net sales in our mattress fabrics business was driven by lower sales for the first nine months of fiscal 2025 due to pressure from muted demand across the industry and related challenges from weaker consumer spending and housing market trends.

In the fourth quarter of fiscal 2025, sales for the segment improved compared to the prior-year fourth quarter, driven in part by new business with larger customers and an emphasis on targeted areas within the mattress fabrics and cut and sewn covers segments.

The decrease in net sales in our upholstery fabrics business was primarily attributable to the pressure on residential furniture fabric sales from continued demand deterioration in the home furnishings industry driven by a challenging macroeconomic environment and its impacts on consumer discretionary spending and home sales.

Sales in our upholstery fabrics business in fiscal 2025 were also negatively affected by the market uncertainty stemming from the global trade negotiations and tariff-related actions in the fourth quarter.

See the Segment Analysis located in the Results of Operations section below for further details.

Loss Before Income Taxes

Overall, our consolidated loss before income taxes was $(10.8) million for fiscal 2024, compared with loss before income taxes of $(28.4) for the prior year.

Operating performance for fiscal 2024, as compared to the prior year, was positively affected by a more profitable mix of sales and better inventory management 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 lower sales during the year, as well as production inefficiencies mostly related to certain new product launches in the mattress fabrics segment.

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

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

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

Overall, our consolidated loss before income taxes was $(18.7) million for fiscal 2025, compared with loss before income taxes of $(10.8) million for the prior year.

Operating performance for fiscal 2025, as compared to the prior year, decreased as a result of the decline in net sales described above and was significantly impacted by restructuring and restructuring-related expenses totaling approximately $9.4 million, compared to approximately $676,000 in fiscal 2024.

Operating performance in fiscal 2025 benefited from consistent operating improvement during the year in the mattress fabrics segment driven by the fixed cost and efficiency benefits derived from the Fiscal 2025 restructuring, the upholstery fabrics segment’s ability to generate profitability despite a low-revenue environment in the residential home furnishings market throughout the year and tariff-related challenges in the fourth quarter, and lower inventory markdowns in the fourth quarter resulting from a change in accounting estimate which aligned our markdown policy for finished goods inventory with current market trends and product life cycles.

See the Segment Analysis located in the Results of Operations section below for further details.

We recorded income tax expense of $3.0 million, or (28.3)% of loss before income taxes, for fiscal 2024, compared with income tax expense of $3.1 million, or (11.0)% of loss before income taxes, for fiscal 2023.

We recorded income tax expense of $392,000, or (2.1)% of loss before income taxes, for fiscal 2025, compared with income tax expense of $3.0 million, or (28.3)% of loss before income taxes, for fiscal 2024.

Our negative consolidated effective income tax rates during fiscal 2025 and fiscal 2024 were caused by the mix of earnings between our U.S.

operations and foreign subsidiaries, as our taxable income stems from our operations located in China and Canada, which have higher income tax rates than the U.S.

operations and foreign subsidiaries, as our taxable income stemmed from our operations located in China during fiscal 2025 and both our operations located in China and Canada during fiscal 2024, which jurisdictions have higher income tax rates than the U.S.

In addition, we applied a full valuation allowance against our U.S.

deferred income tax assets

during both fiscal 2024 and fiscal 2023.

deferred income tax assets during both fiscal 2025 and fiscal 2024.

Consequently, an income tax benefit was not recognized for the pre-tax losses associated with our U.S.

operations totaling $(18.4) million and $(18.6) million that were incurred during fiscal 2025 and fiscal 2024, respectively.

During fiscal 2024, we incurred a significantly lower consolidated pre-tax loss of $(10.8) million, compared with a significantly higher pre-tax loss of $(28.4) million incurred during fiscal 2023.

Lastly, our negative consolidated effective income tax rates were also caused by pre-tax losses associated with our Haitian operations, which are not currently subject to income tax.

As a result, an income benefit was not recognized for the pre-tax losses associated with our Haitian operations totaling $(1.6) million and $(2.1) million that were incurred during fiscal 2025 and fiscal 2024, respectively.

During fiscal 2025, we incurred a significantly higher consolidated pre-tax loss of $(18.7) million, compared with a significantly lower pre-tax loss of $(10.8) million incurred during 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 fiscal 2024 compared with fiscal 2025.

During fiscal 2024 and fiscal 2023, we had income tax payments totaling $3.3 million and $2.3 million, respectively, which primarily represented income tax payments associated with our foreign operations located in China and Canada.

During fiscal 2025 and fiscal 2024, we had income tax payments totaling $2.3 million and $3.3 million, respectively, which primarily represented income tax payments associated with the U.S.

federal transition tax associated with the 2017 Tax Cuts and Jobs Act ("TCJA") and our operations located in China.

Refer to Note 12 of the consolidated financial statements for further details regarding our provision for income taxes.

As of April 27, 2025, our cash and cash equivalents (“cash") totaled $5.6 million, a decrease of $4.4 million compared with cash of $10.0 million as of April 28, 2024.

This decrease was mostly due to (i) net cash used in operating activities totaling $8.2 million;

and (ii) capital expenditures of $3.7 million mostly related to our mattress fabrics segment;

partially offset by (iii) proceeds from the sale of equipment and a note receivable totaling $715,000 (see Note 9 to the consolidated financial statements for further details).

Our net cash used in operating activities was $8.2 million during fiscal 2024, a decrease of $16.0 million compared with net cash provided by operating activities of $7.8 million during fiscal 2023.

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

(ii) a significant increase in accounts payable during fiscal 2023, related to an abnormally high decrease in accounts payable due to the COVID-19 related shutdowns that affected our operations located in China during the fourth quarter of fiscal 2022, that did not recur during fiscal 2023 or fiscal 2024;

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

and (iv) an increase in income tax payments (see Note 11 to the consolidated financial statements for tabular disclosure of income tax payments by jurisdiction);

partially offset by (v) an increase in cash earnings during fiscal 2024 compared with fiscal 2023, and (vi) a decrease in accounts receivable during fiscal 2024, which reflects a 19.4% decrease in net sales during the fourth quarter of fiscal 2024, as compared to the fourth quarter of fiscal 2023.

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

This decrease was primarily due to:

(i) net cash used in operating activities totaling $17.7 million and (ii) capital expenditures of $2.9 million, that were partially offset by net borrowings from our lines of credit totaling $12.7 million, and proceeds from the sale of property, plant, and equipment totaling $1.9 million related to our restructuring activities.

Our net cash used in operating activities was $17.7 million during fiscal 2025, an increase of $9.5 million compared with net cash used in operating activities of $8.2 million during fiscal 2024.

This trend mostly reflects:

(i) a significant decrease in cash earnings related to our recent restructuring activities, (ii) an increase in inventory purchases to maintain an appropriate level of inventory to accommodate our customers during the company's restructuring activities as described in the section titled "-Segment Analysis-Mattress Fabrics Segment-Restructuring Activities," and (iii) a decrease in cash flow from accounts receivable primarily due to longer payment trends related to a higher mix with customers with longer payment terms, partially offset by an increase in accounts payable due to an increase in inventory purchases from significant vendors who extended their payment terms during fiscal 2025 compared with fiscal 2024.

We had outstanding borrowings totaling $12.7 million under our line of credit agreements, of which $8.1 million and $4.6 million were reported in line of credit-current and line of credit-long term, respectively, on the April 27, 2025, Consolidated Balance Sheet.

For further discussion, see “—Liquidity and Capital Resources,” below.

Results of Operations

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(dollars in thousands)

Gross profit (loss)

Selling, general and administrative expenses

Restructuring expense

Loss from operations

Operating margin

Mattress fabrics sales increased 4.8% in fiscal 2024 compared to the prior year.

This increase was driven by higher sales for the first nine months of fiscal 2024, primarily due to new fabric and sewn cover placements 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 as compared to historical average selling prices.

The increase in sales during the first nine months of the year was partially offset by lower sales during the fourth quarter, as sales were pressured by weakness in the domestic mattress industry, driven by a challenging macroeconomic environment that affected consumer discretionary spending and housing markets.

The decline in fourth quarter sales, along with ongoing macroeconomic challenges, caused us to take aggressive action 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 in May 2024 (our fiscal 2025 year), and we are making steady progress on the execution of this restructuring, which is expected to be mostly completed by the end of the calendar year.

See “—Restructuring Activities” below for further details.

Looking ahead, we are diligently focused on winning new placements to drive revenue and increase 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 possible economic and health effects from additional surges in the coronavirus, remain unknown and depend on factors beyond our knowledge or control.

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

Mattress fabrics sales decreased by 2.1% in fiscal 2025 compared to the prior year.

The decrease in net sales was chiefly attributable to a year-over-year sales decline for the first nine months of fiscal 2025 driven by subdued industry demand that we believe was brought on by weaker consumer spending and housing market headwinds.

In the fourth quarter of fiscal 2025, sales for the segment improved compared to the prior-year fourth quarter, driven by new business with larger customers and a strategic focus on key segments including mattress fabrics and cut-and-sewn covers.

Looking ahead, we remain committed to winning market share and generating sales growth in our mattress fabrics business.

We believe our products continue to be on-trend and well received by customers, and that our expanded U.S.

production capabilities, nearshore manufacturing platform in Haiti on the Dominican Republic border, and dedicated, long-tenured sourcing relationships in Turkey, Vietnam and China provide our customers with valuable mitigation opportunities for global tariff and trade risks going forward.

Moreover, the completion of the Fiscal 2025 restructuring and resulting lower fixed cost base and enhancements in our mattress fabrics segment provide us with more operational flexibility to succeed in a variety of industry demand scenarios going forward.

We currently anticipate that the macroeconomic environment will continue to weigh on consumer spending, housing market trends, and our net sales going forward, and that broader consumer purchasing activity and macroeconomic improvement will be necessary for a recovery and expansion in the mattress sector.

Additionally, ongoing geopolitical uncertainties, such as the current global trade negotiations and

conflicts in Ukraine and the Middle East, remain unpredictable and beyond our control.

These factors could disrupt global markets and negatively impact our sales, operations and financial performance.

Gross Profit and Operating Income

The decrease in this segment’s operating loss during fiscal 2024, as compared to fiscal 2023, was primarily due to higher sales through the first nine months of the year as described above, along with better inventory management (i.e., in the prior fiscal year, operating performance was pressured by $2.9 million in inventory impairment charges, $2.6 million in losses from closeout sales of raw material and finished goods inventory, and $386,000 in markdowns of inventory based on our policy for aged inventory.

These charges, losses from closeout sales, and markdowns did not recur, or were significantly less, in fiscal 2024).

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

Higher SG&A expense for fiscal 2024, as compared to fiscal 2023, was primarily due to an increase in trade show expense (in connection with the bi-annual ISPA bedding show);

an increase in allowance for customer credit risk;

and an increase in sampling expense due to a reorganization of this segment's U.S.

cut and sew operation.

We expect the ongoing industry softness affecting sales volumes will affect profitability through at least the first half 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.

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.

The improvement in this segment’s operating loss during fiscal 2025, as compared to fiscal 2024, was primarily driven by the fixed cost reductions and related efficiency gains generated by the Fiscal 2025 restructuring, which drove steady operating improvement in the mattress fabric segment over the course of the year and significant year-over-year improvement in gross margins in the fourth quarter.

Operating performance during fiscal 2025 was significantly affected by restructuring and restructuring-related expenses for this segment totaling approximately $8.5 million.

Additionally, lower sales during the year, which were driven by the difficult macroeconomic environment and its impact on consumer discretionary spending and housing market trends, pressured operating performance in the mattress fabrics segment.

We anticipate the ongoing slowdown impacting sales volumes across the home furnishings industry to continue pressuring operating performance as we move further into fiscal 2026.

However, with the Fiscal 2025 restructuring now completed and our global platform better optimized from a fixed cost perspective, we believe that our mattress fabrics segment is positioned to operate more efficiently and profitably.

In addition, we recently initiated price increases in our mattress segment that are intended to soften the cost impacts of recent tariff actions affecting products imported into the U.S.

These price increases will become effective beginning in the second quarter of fiscal 2026.

We will continue to evaluate further operating adjustments to our mattress fabrics segment as needed to align with demand levels.

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;

Restructuring Activities Announced May 1, 2024

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 the closure and sale of the Property located in Quebec, Canada;

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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.

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

We expect the consolidation activity associated with the sewn mattress cover operation located in Haiti will be completed during the first quarter of fiscal 2025.

These actions are expected to result in estimated restructuring and restructuring related costs and charges of approximately $8.0 million, of which approximately $2.5 million is expected to be cash expenditures.

The costs include cash charges of approximately $1.1 million associated with expected ongoing operating losses and other exit and disposal expenses related to the company's manufacturing plant in Quebec, Canada;

cash charges of approximately $1.4 million for employee termination costs;

a non-cash charge of approximately $2.3 million associated with accelerated depreciation and losses on the sale of equipment;

a non-cash charge of approximately $2.1 million associated with write-downs and other inventory related adjustments;

and a non-cash charge of approximately $650,000 associated with accelerated rent amortization for a leased building in Haiti.

These restructuring charges and restructuring related costs and charges exclude any expected gain on the sale of real estate associated with the closure of the Canadian facility, the amount of which is currently undetermined but which will ultimately reduce the amount of the restructuring charges incurred (and based on management's internal analysis, we expect cash proceeds from the sale of real estate (net of all taxes and commissions) to exceed the amount of restructuring charges incurred).

Also, management estimates that the realizable fair market value of the long-lived assets at the Canadian and Haitian facilities exceed their net book value, and for that reason, no charges for impairment of long-lived assets (other than the restructuring charges noted above) are expected to be recorded in the connection with this decision for either location.

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

All the above restructuring activities related to this announcement have been completed, including the sale of the Property located in Quebec, Canada, effective April 30, 2025 (first quarter of fiscal 2026).

Accordingly, we expect to record a gain from this sale totaling $4.0 million that will be recorded in restructuring expense (credit) in the consolidated statement of net income (loss) for the first quarter of fiscal 2026.

See Note 8 located in the notes to the consolidated financial statements and “—Assets held for sale,” below for further details regarding the sale of the Property.

During fiscal 2025, we incurred restructuring and restructuring related charges totaling $8.7 million related to the above mentioned initiatives, of which $8.5 million and $154,000 relate to the mattress fabrics and upholstery fabrics segments, respectively.

As mentioned above, the restructuring activities related to this initiative were completed during the first quarter of fiscal 2026.

Accordingly, we expect to record a restructuring credit of $3.8 million for the first quarter of fiscal 2026, which reflects the the gain on the sale of Property located in Quebec, Canada, partially offset by other expected restructuring expenses.

Overall, we expect cumulative net restructuring and restructuring related charges of approximately $4.9 million related to this initiative.

The following summarizes the restructuring and restructuring related charges associated with our mattress fabrics segment for the twelve-month period ended April 27, 2025:

Twelve Months Ended

(dollars in thousands)

April 27, 2025

Additional depreciation expense for shortened useful lives of equipment

Employee termination benefits

Facility consolidation and relocation expenses

Loss on disposal, valuation, and markdowns of inventory

Lease termination costs

Other associated costs

Net gain on sale of equipment

Restructuring expense and restructuring related charges (1)

(1 ) Of the total $8.5 million, $6.9 million and $1.6 million were recorded within restructuring expense and cost of sales, respectively, in the fiscal 2025 Consolidated Statement of Net Loss.

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)

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Property, plant & equipment

Assets held for sale

Right of use assets

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Accounts Receivable

The decrease in accounts receivable reflects the decrease in net sales during the fourth quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023.

Net sales during the fourth quarter of fiscal 2024 were $25.8 million, a decrease of (16.1)% compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.

In addition, we experienced faster cash collections from a significant customer who utilized more cash discounts during the fourth quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023.

This led to a decrease in days' sales outstanding from 37 days during the fourth quarter fiscal 2023, as compared with 35 days during the fourth quarter of fiscal 2024.

The increase in inventory primarily reflects lower than anticipated demand trends in relation to inventory purchases and production during the fourth quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023.

Net sales during the fourth quarter of fiscal 2024 were $25.8 million, a decrease of 16.1% compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.

The increase in accounts receivable mostly reflects an increase in net sales during the fourth quarter of fiscal 2025, as compared with the fourth quarter of fiscal 2024.

Net sales during the fourth quarter of fiscal 2025 were $27.1 million, an increase of 5.3% compared with net sales of $25.8 million during the fourth quarter of fiscal 2024.

Days' sales outstanding were 35 days during both the fourth quarters of fiscal 2025 and 2024.

In connection with the restructuring activity described above in "Restructuring Activities," the increase in inventory represents an increase in finished goods inventory to accommodate our customers while our weaving operation was transitioned to a strategic sourcing model with long standing supply partners, and our knitting and finishing capacity was relocated from our former manufacturing facility located in Quebec, Canada, to our facility located in Stokesdale, North Carolina.

This increase in finished goods inventory was partially offset by lower raw material purchases related to the gradual discontinuation of the company's manufacturing operations located in Quebec, Canada, as described above in "Restructuring Activities." In addition, the increase in inventory reflects:

(i) a non-cash inventory credit regarding a change in accounting estimate related to aligning our finished goods inventory markdown policy with current market trends and product life cycles (see Note 1 of the consolidated financial statements for assessment made and conclusions reached as of April 27, 2025), and (ii) an increase in net sales in our mattress fabrics segment during the fourth quarter of fiscal 2025, as compared with the fourth quarter of fiscal 2024.

Net sales in our mattress fabrics segment during the fourth quarter of fiscal 2025 were $27.1 million, an increase of 5.3% compared with net sales of $25.8 million during the fourth quarter of fiscal 2024.

Inventory turns were 2.9 for the fourth quarter of fiscal 2025, compared with 3.6 for the fourth quarter of fiscal 2024.

Property, Plant, & Equipment

The decrease in property, plant, and equipment represents a continued maintenance level of capital spending with a strategic focus on capital projects that will increase efficiencies and improve the quality of our products.

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.

During fiscal 2024 and continuing through fiscal 2025, property, plant, and equipment, steadily decreased due to reduced capital spending that stemmed from current unfavorable macroeconomic conditions within the bedding industry, as well as actions taken as described above in "Restructuring Activities."

The $23.3 million as of April 27, 2025, represents property, plant, and equipment of $22.3 million and $955,000 located in the U.S.

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.

Assets Held for Sale

As of April 27, 2025, we classified the Property located in Quebec, Canada, as held for sale totaling $2.2 million, which is presented separately in the consolidated balance sheet as of April 27, 2025, and was no longer being depreciated.

See Note 10 in the consolidated financial statements for further details regarding the restructuring activities announced on May 1, 2024 (first quarter of fiscal 2025).

Effective April 30, 2025 (first quarter of fiscal 2026), we closed on the sale of our Property located in Quebec, Canada.

We expect to record a gain from this sale totaling $4.0 million that will be recorded within restructuring expense (credit) in the consolidated statement of net income (loss) for the first quarter of fiscal 2026.

The sale of our Property was pursuant to an amended agreement effective April 2, 2025, which incorporated an original agreement and prior amendment (collectively referred to as the "Sales Agreement"), to sell our Property located in Quebec, Canada, to a third party.

Pursuant to the Sales Agreement, the total sales price for this Property was $8.6 million CAD ($6.2 million USD as of April 30, 2025), of which $750,000 CAD ($543,000 USD as of April 27, 2025) was received in the fourth quarter of fiscal 2025 and recorded within accrued expenses in the Consolidated Balance Sheet, $1.3 million CAD ($905,000 USD as of April 30, 2025) was received at closing during the first quarter of fiscal 2026, with the remaining balance of $6.6 million CAD ($4.8 million USD as of April 30, 2025) to be received along with interest earned at rates ranging from 6% to 10% over a period of six to twelve months, as specified in the Sales Agreement.

Right of Use Assets

The decrease in right of use assets stems from rent expense incurred over the terms of the respective lease agreements.

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.

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

In addition, in connection with the restructuring activity described above in "Restructuring Activities" right of use assets decreased due to the termination of an agreement to lease a facility located in Ouanaminthe, Haiti, and shortened the periods of use associated with two leased facilities located in Quebec, Canada.

The $125,000 as of April 27, 2025, represents right of use assets located in Haiti.

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.

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(dollars in thousands)

Upholstery fabrics sales decreased 12.1% in fiscal 2024 compared to the prior year.

This decrease primarily reflects ongoing softness in the residential home furnishings industry, where demand was pressured throughout the year by a challenging macroeconomic environment that affected consumer discretionary spending and reduced home sales.

Sales during the prior year were also positively affected by receipt of a $1.0 million non-recurring payment (relating to newly negotiated terms with a Haiti cut and sew customer) that did not recur during fiscal 2024.

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 or 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.

Upholstery fabrics sales decreased by 8.8% in fiscal 2025 compared to the prior year.

This decline primarily reflects the continued downturn in the home furnishings market, where demand remained constrained throughout the year due to persistent macroeconomic challenges adversely impacting consumer discretionary spending and housing market activity.

The additional tariffs and related measures imposed upon products imported into the U.S.

from China during our fourth quarter also greatly reduced activity in the residential furniture and upholstery fabrics markets and pressured sales in this segment in fiscal 2025.

Looking forward, we expect the sustained softness in industry demand for home furnishings and the continued uncertainty from global trade and tariff-related actions to continue to impact our residential upholstery business in fiscal 2026.

Despite these headwinds, we remain confident in the long-term positioning of our upholstery fabrics business and our ability to provide a wide range of innovative and on-trend products to customers through both our internal manufacturing platforms and our long-standing sourcing capabilities and supplier partnerships.

Additionally, we continue to see solid demand trends within our hospitality and contract upholstery product line and believe that our business in those areas is well-positioned for growth going forward.

Ongoing geopolitical uncertainties, including the conflicts in Ukraine and the Middle East, and the potential imposition, reinstatement, or extension of tariffs by the U.S.

government on imports from various countries, including China, introduce risks that remain highly unpredictable and beyond our control.

Should any of these situations or conditions deteriorate or intensify and cause disruptions to global shipping routes or material increases in tariff-related costs, there could be adverse effects on our operations, as well as on our suppliers, customers, and consumers generally.

Such developments may, in turn, negatively influence our overall financial performance and the broader home furnishings industry and global economic environment in which we operate.

Gross Profit and Operating Income

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Operating margin

The increase in upholstery fabrics profitability for fiscal 2024, as compared to fiscal 2023, primarily reflects a more profitable mix of sales;

better inventory management (i.e., in the prior fiscal year, operating performance was pressured by $2.5 million in markdowns of inventory based on our policy for aged inventory, while such markdowns were significantly lower in fiscal 2024);

a more favorable foreign exchange rate in China;

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

These factors were partially offset by lower sales during the year.

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 (see 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 will continue to affect our profitability.

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

improvement in our Read Window 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.

The decrease in upholstery fabrics profitability for fiscal 2025, as compared to fiscal 2024, was driven primarily by lower sales during the year due to the prolonged slowdown in demand for home furnishings and related items.

The increased sales pressure during the year was partially offset by lower inventory markdowns stemming from a change in accounting estimate to align our markdown policy for finished goods inventory with current market trends and product life cycles, lower SG&A expenses, and lower fixed costs resulting from restructuring-related adjustments to our upholstery fabrics finishing operation in China to better align with demand and leverage strategic supply relationships.

Looking ahead, the residential home furnishings market is anticipated to remain constrained by broader macroeconomic factors, particularly those limiting discretionary consumer expenditures and influencing housing market activity.

As a result, we foresee continued softness in sales volumes across our residential upholstery segment, which we expect to put ongoing pressure on overall profitability in our upholstery fabrics business.

However, we expect the solid demand in our hospitality fabrics segment to drive more growth in that higher-margin area of our upholstery business and provide some positive counterbalance to the residential demand deterioration.

We intend to pursue additional initiatives aimed at streamlining our cost structure and enhancing the operating performance of our upholstery fabrics business, better equipping it to navigate current market headwinds.

As part of this strategy, we plan to wind down operations at our leased facility in Burlington, North Carolina, and absorb them into our owned facility in Stokesdale, North Carolina, leveraging a shared management and resource model.

This consolidation is expected to generate meaningful cost savings and operational improvement beginning in the third quarter of fiscal 2026.

In addition, we recently initiated price increases in our upholstery fabrics business that are designed to mitigate the impacts of recent tariff actions affecting products imported into the U.S., particularly those imported from China.

Restructuring Activities

Restructuring Activities Announced April 24, 2025

On April 24, 2025 (fourth quarter of fiscal 2025), the company announced a strategic transformation of its operating model that will combine certain activities within the mattress fabrics and upholstery fabrics business segments and creating an integrated Culp-branded business.

As part of this strategic transformation , we will close our leased facility operated by our upholstery fabrics segment located in Burlington, North Carolina, and transition its production and distribution activities utilizing a shared management model within our owned facility located in Stokesdale, North Carolina, which has been solely operated by our mattress fabrics segment.

During fiscal 2025, we incurred restructuring expense of $676,000 related to this strategic transformation, of which $540,000 and $136,000 relate to unallocated corporate and the upholstery fabrics segment, respectively.

The estimated cumulative restructuring and restructuring related charges for these initiatives is expected to be $1.5 million, of which $288,000 is expected to be cash expenditures.

The $1.5 million of expected cumulative restructuring and restructuring related charges associated with these activities represents (i) a non-cash charge for impairment of Read's tradename totaling $540,000 (see Note 6 of the consolidated financial statements for further details);

(ii) a non-cash charge of $425,000 associated with markdowns and other inventory related adjustments;

(iii) non-cash lease termination costs of $224,000;

(iv) cash charges for employee termination benefits of $173,000, and (v) cash charges for facility consolidation and relocation expenses of $115,000.

We expect the initiatives associated with this strategic transformation to be substantially completed by December 31, 2025.

Ouanaminthe, Haiti

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

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

("CHF Haiti") during the fourth quarter of fiscal 2023.

Cut and Sewn Upholstery Fabrics Operation

During the third quarter of fiscal 2023, CUF Haiti entered into an agreement to terminate a lease associated with one of its facilities and moved the production of upholstery cut and sewn kits to an existing facility leased by CHF Haiti during the fourth quarter of fiscal 2023.

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

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

This restructuring activity was completed during the third quarter of fiscal 2024, and we incurred a cumulative restructuring and restructuring related charge of $1.3 million from the commencement of this restructuring activity during the third quarter of fiscal 2023 through the third quarter of fiscal 2024.

See Note 9 of the consolidated financial statements for further details regarding the agreement to terminate the above mentioned lease agreement and a related note receivable.

This restructuring activity commenced during the third quarter of fiscal 2023, and was completed during the third quarter of fiscal 2024 and resulted in a cumulative restructuring and restructuring related charge of $1.3 million.

See Note 7 of the consolidated financial statements for further details regarding the agreement to terminate the above mentioned lease and the establishment of a note receivable.

Shanghai, China

Cut and Sew Upholstery Fabrics Operation

During the second quarter of fiscal 2023, we closed our cut and sew upholstery fabrics operation 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 demand for cut and sewn products.

This restructuring

activity was completed during the third quarter of fiscal 2023, and we incurred a cumulative restructuring and restructuring related charge of $713,000 during the second and third quarters of fiscal 2023.

Upholstery Fabrics Finishing Operation

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

This restructuring activity is expected to be completed by the end of the first quarter of fiscal 2025.

The following summarizes our restructuring expense and restructuring related charges from the restructuring activities noted above for the twelve months ending April 28, 2024, and April 30, 2023:

During the fourth quarter of fiscal 2024, we closed our upholstery fabrics finishing operation in China to align with current demand trends.

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

Financial Information

The following summarizes the restructuring and restructuring related charges associated with our upholstery fabrics segment for the twelve-month periods ended April 27, 2025, and April 28, 2024:

(dollars in thousands)

Employee termination benefits

Lease termination costs

Impairment loss - leasehold improvements and equipment

Facility consolidation and relocation expenses

Impairment and loss on sale of equipment

Loss on disposal and markdowns of inventory

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Restructuring expense and restructuring related charges (1) (2) (3) (4)

(1) Of the total $676,000 for fiscal 2024, $636,000 and $40,000 were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the twelve-month period ending April 28, 2024.

(2) Of the total $1.5 million for fiscal 2023, $1.4 million and $98,000 were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the twelve-month period ending April 30, 2023.

(1) The total $304,000 was recorded within restructuring expense in the fiscal 2025 Consolidated Statement of Net Loss.

(2) Of the total $304,000, (i) $154,000 related to the restructuring activities announced on May 1, 2024, as described in the section titled "-Segment Analysis-Mattress Fabrics Segment-Restructuring Activities," (ii) $136,000 related to the strategic transformation initiatives announced on April 24, 2025, as described above in "Restructuring Activities", and (iii) $14,000 related to the closure of our upholstery fabrics finishing operation located in Shanghai, China.

(3) Of the total $676,000, $636,000 and $40,000 were recorded within restructuring expense and cost of sales, respectively, in the fiscal 2024 Consolidated Statement of Net Loss.

(4) Of the total $676,000, $472,000 and $204,000 related to our restructuring activities within our operations in Ouanaminthe, Haiti, and Shanghai, China, respectively.

Segment Assets

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Accounts Receivable

The decrease in accounts receivable reflects the decrease in net sales during the fourth quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023.

Net sales during the fourth quarter of fiscal 2024 were $23.8 million, a decrease of 22.6% compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.

The decrease was partially offset by slower cash collections during the fourth quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023, due to an unfavorable sales mix with customers with longer credit terms.

This led to an increase in days' sales outstanding to 37 days during the fourth quarter fiscal 2024, as compared with 33 days during the fourth quarter of fiscal 2023.

As of April 27, 2025, accounts receivable modestly increased, compared with April 28, 2024.

This modest increase was due to longer payment trends during the fourth quarter of fiscal 2025, compared with the fourth quarter of fiscal 2024, due to a higher sales mix with customers who had longer credit terms.

Accordingly, days' sales outstanding increased to 46 days for the fourth quarter of fiscal 2025, compared with 37 days for the fourth quarter of fiscal 2024.

The increase in accounts receivable due to longer payments trends, was mostly offset by a decrease in net sales during the fourth quarter of fiscal 2025, compared with the fourth quarter of fiscal 2024.

Net sales during the fourth quarter of fiscal 2025 were $21.7 million, a decrease of 8.9%, compared with $23.8 million during the fourth quarter of fiscal 2024.

The decrease in inventory reflects the decrease in net sales during the fourth quarter of fiscal 2025, as compared with the fourth quarter of fiscal 2024.

Net sales during the fourth quarter of fiscal 2024 were $23.8 million, a decrease of 22.6% compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.

Inventory turns were 4.4 during the fourth quarter of fiscal 2024, compared with 4.8 for the fourth quarter of fiscal 2023.

Net sales during the fourth quarter of fiscal 2025 were $21.7 million, a decrease of 8.9%, compared with $23.8 million during the fourth quarter of fiscal 2024.

The decrease in inventory related to the decline in net sales, and was partially offset by a non-cash inventory credit regarding a change in accounting estimate related to aligning our finished goods inventory markdown policy with current market trends and product life cycles (see Note 1 of the consolidated financial statements for assessment made and conclusions reached as of April 27, 2025).

Inventory turns were 4.0 during the fourth quarter of fiscal 2025, compared with 4.4 during the fourth quarter of fiscal 2024.

Property, Plant, & Equipment

The decrease in property, plant, and equipment represents an impairment charge related to equipment of $329,000 resulting from the discontinuation of production of cut and sewn upholstery kits at the company's facility located in Ouanaminthe, Haiti, and continued maintenance level of capital spending as a result of the current and expected unfavorable industry conditions.

As of April 27, 2025, property, plant, and equipment remained flat compared with April 28, 2024.

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 $1.0 million as of April 27, 2025, represents property, plant, and equipment of $940,000 and $70,000 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.

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

Right of Use Assets

The decrease in right of use assets reflects rent expense incurred over the terms of our existing lease agreements, partially offset by the renewal of our agreement to lease a facility with Read and certain facilities associated with our operations located in China.

The increase in right of use assets represents the renewal of certain lease agreements associated with our operations located in China and Burlington, North Carolina, totaling $2.4 million, partially offset by rent expense incurred over the terms of the existing lease agreements.

The $2.7 million as of April 27, 2025, represents right of use assets of $1.7 million and $1.0 million 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 the U.S.

and China, 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.

Other Income Statement Categories

Other Consolidated Income Statement Categories

Twelve Months Ended

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Interest income

Restructuring expense - unallocated corporate

Other expense

Selling, General, and Administrative Expenses

The modest increase in selling, general, and administrative expenses during fiscal 2024, as compared with fiscal 2023, is due to a variety of factors, including (i) wage inflation;

(ii) an increase in travel, entertainment, and trade show expenses;

(iii) an increase in allowance for customer credit risk;

and (iv) an increase in sampling expense due to a reorganization of the mattress fabric segment's U.S.

cut and sew operation;

mostly offset by (v) $1.3 million in lower compensation expense, reflecting unfavorable financial results in relation to pre-established targets.

The decrease in selling, general, and administrative expenses during fiscal 2025, compared with fiscal 2024, is due primarily to:

(i) lower incentive compensation expense reflecting unfavorable financial results in relation to pre-established performance targets, (ii) lower compensation expense due to the company's restructuring activities, and (iii) reduced spending on consulting fees and professional services.

Interest Expense

Interest expense reflects our historically low level and short duration of borrowings outstanding.

The increase in interest expense reflects our increased borrowings under line of credit agreements associated with our operations located in the U.S.

Interest Income

The increase in interest income is due primarily to higher market interest rates earned during fiscal 2024, as compared with fiscal 2023.

The decrease in interest income is due to lower average cash balances during fiscal 2025, compared with fiscal 2024.

Restructuring Expense - Unallocated Corporate

In connection with our annual impairment assessment of Read's tradename, as of April 27, 2025, we recorded a charge of $540,000 which represents the entire carrying value of Read's tradename.

This conclusion was based on management's decision, announced on April 24, 2025, to strategically transform the company's operating model by combining certain activities within the mattress fabrics and upholstery fabrics business segments and becoming one integrated and Culp-branded business.

Since the company is transforming into a single Culp-branded business, Read's tradename will be phased out during fiscal 2026, and will no longer be used to market upholstery fabric products to customers associated with the hospitality industry.

See Note 19 located in the notes to the consolidated financial statements for assets classified as segment assets.

Other Expense

The increase in other expense in fiscal 2024, as compared to fiscal 2023, is primarily due to the increase in fees and other costs associated with our ABL Credit agreement effective on January 19, 2023.

See Note 10 located in the consolidated financial statements for further details regarding the terms and covenants associated with the ABL Credit Agreement.

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

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

During fiscal 2024, other expense included a foreign exchange rate gain of $545,000, compared with a foreign exchange rate gain of $500,000 during fiscal 2023.

The $545,000 and $500,000 foreign exchange rate gains reported in fiscal 2024 and fiscal 2023 mostly relate to foreign currency exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S.

The increase in other expense during fiscal 2025, compared with fiscal 2024, was primarily due to less favorable foreign exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S.

dollar financial reporting amounts.

During fiscal 2024, we recorded a foreign exchange rate gain of $604,000 related to our operations located in China, which was mostly non-cash and was offset by $541,000 of income tax expense.

This income tax expense of $541,000 was associated with taxable foreign exchange rate gains based on less favorable foreign currency exchange rates applied against balance sheet accounts denominated in U.S.

During fiscal 2025, we reported a foreign exchange rate gain associated with our operations located in China totaling $141,000, compared with a foreign exchange rate gain of $604,000 during fiscal 2024.

The foreign exchange rate gain of $141,000 described above was mostly non-cash and offset by income tax expense of $125,000.

This income tax expense of $125,000 was associated with taxable foreign exchange rate gains based on more 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 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 foreign exchange rate gain derived from our U.S.

dollar denominated balance sheet accounts is considered taxable income, as we incur income tax expense and pay income taxes in China’s local currency.

Effective Income Tax Rate & Income Tax Expense

We recorded income tax expense of $3.0 million, or (28.3)% of loss before income taxes, during fiscal 2024, compared with income tax expense of $3.1 million, or (11.0)% of loss before income taxes, during fiscal 2023.

We recorded income tax expense of $392,000, or (2.1)% of loss before income taxes, during fiscal 2025, compared with income tax expense of $3.0 million, or (28.3)% of loss before income taxes, during fiscal 2024.

The following schedule summarizes the principal differences between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:

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foreign tax rate differential

income tax effects of Chinese foreign exchange gains and losses

income tax effects of Chinese foreign exchange gains

withholding taxes associated with foreign tax jurisdictions

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(1) “Other” for all periods presented represents miscellaneous adjustments that pertain to U.S.

permanent differences such as meals and entertainment expense and income tax provision to return adjustments.

permanent differences such as meals and entertainment, income tax provision to return adjustments, and other miscellaneous items.

(2) Our negative consolidated effective income tax rates during fiscal 2025 and fiscal 2024 were caused by the mix of earnings between our U.S.

operations and foreign subsidiaries, as our taxable income stems from our operations located in China and Canada, which have higher income tax rates than the U.S.

In addition, we applied a full valuation allowance against our U.S.

deferred income tax assets during both fiscal 2024 and fiscal 2023.

deferred income tax assets during both fiscal 2025 and fiscal 2024, respectively.

Consequently, an income tax benefit was not recognized for the pre-tax losses associated with our U.S.

operations totaling $(18.4) million and $(18.6) million that were incurred during fiscal 2025 and fiscal 2024, respectively.

(3) During fiscal 2024, we incurred a significantly lower consolidated pre-tax loss of $(10.8) million, compared with a significantly higher pre-tax loss of $(28.4) million incurred during fiscal 2023.

(3) Our negative consolidated effective income tax rates during fiscal 2025 and 2024 were further caused by our pre-tax losses associated with our Haitian operations, which are not subject to income tax.

Our Haitian operations are located in an economic zone that permits a 0% income tax rate for the first fifteen years of operations, for which we have seven years remaining.

As a result of the 0% income tax rate, an income tax benefit was not recognized for the pre-tax losses associated with our Haitian operations totaling $(1.6) million and $(2.1) million that were incurred during fiscal 2025 and fiscal 2024, respectively.

(4) During fiscal 2025, we incurred a significantly higher consolidated pre-tax loss of $(18.7) million, compared with a significantly lower pre-tax loss of $(10.8) million incurred during fiscal 2024.

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

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pre-tax losses during each of the last three fiscal years.

In addition, we are currently expecting U.S.

pre-tax losses to continue into fiscal 2025.

In addition, we are currently expecting a U.S.

pre-tax loss during fiscal 2026.

As a result of the significant weight of this negative evidence, we believe it is more-likely-than-not that our U.S.

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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 a record a deferred income tax liability for those undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely.

parent company, and whether we are required to a record a deferred income tax liability for those undistributed earnings from

foreign subsidiaries that will not be reinvested indefinitely.

As of April 27, 2025, we assessed the liquidity requirements of our U.S.

parent company and determined that our undistributed earnings from our foreign subsidiaries would not be reinvested indefinitely and

therefore, would be eventually distributed to our U.S.

parent company and determined that our undistributed earnings from our foreign subsidiaries would not be reinvested indefinitely and therefore, would be eventually distributed to our U.S.

parent company.

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Uncertainty in Income Taxes

An unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the end of the reporting period, or if the position is effectively settled through examination, negotiation, or litigation, or if the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired.

An unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the end of the reporting period, or is effectively settled through examination, negotiation, or litigation, or if the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired.

If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.

As of April 28, 2024, we had a $1.3 million total gross unrecognized income tax benefit that primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions.

As of April 27, 2025, we had gross unrecognized income tax benefit totaling $790,000 that primarily relates to taxation under applicable income tax treaties with foreign tax jurisdictions.

At this time, a significant change associated with this income tax benefit is not expected within the next fiscal year.

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Income Taxes Paid

The following table sets forth income taxes paid by jurisdiction:

The following table sets forth income taxes paid (refunded) by jurisdiction for the twelve-months ending April 27, 2025, and April 28, 2024 :

(dollars in thousands)

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Canada - Income Taxes

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 based 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 $1.9 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 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 (ii) our existing U.S.

federal net operating loss carryforwards.

In accordance with the 2017 Tax Cuts and Jobs Act, we will be required to pay annual U.S.

federal transition tax payments as follows:

FY 2025- $665,000;

and FY 2026 - $831,000.

2024 compared with 2023

For a comparison of our results of operations for the fiscal years ended April 30, 2023, and May 1, 2022, see “Part II, Item 7.

For a comparison of our results of operations for the fiscal years ended April 28, 2024, and April 30, 2023, see “Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended April 28, 2024, filed with the SEC on July 12, 2024.

Liquidity and Capital Resources

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

As of April 28, 2024, we believe our cash of $10.0 million, cash flow from operations, and the current availability under our revolving credit lines totaling $22.5 million (Refer to Note 10 of the consolidated financial statements for further details) will be sufficient to fund our foreseeable business needs, capital expenditures, commitments, and contractual obligations.

As of April 28, 2024, our cash totaled $10.0 million, a decrease of $11.0 million compared with cash of $21.0 million as of April 30, 2023.

This decrease was mostly due to (i) net cash used in operating activities totaling $8.2 million;

(ii) capital expenditures of $3.7 million mostly related to our mattress fabrics segment;

partially offset by (iii) proceeds from the sale of equipment and a note receivable totaling $715,000 (see Note 9 to the consolidated financial statements for further details).

Our net cash used in operating activities was $8.2 million during fiscal 2024, a decrease of $16.0 million compared with net cash provided by operating activities of $7.8 million during fiscal 2023.

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

and (iv) an increase in income tax payments (see Note 11 to the consolidated financial statements for tabular disclosure of income tax payments by jurisdiction);

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

The income taxes we pay also affect our liquidity.

See the above section titled “ Income Taxes Paid ” of this Item 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION for further details.

Our cash balance may be adversely affected by factors beyond our control, such as (i) recent customer demand trends affecting sales, (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.

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

As of April 27, 2025, we believe:

(i) our cash of $5.6 million, (ii) proceeds totaling $5.7 million during fiscal 2026, for the sale of Property located in Quebec, Canada, as part of our restructuring activities announced on May 1, 2024, (iii) improvement in cash flow from operations stemming from expected cash savings from our recent restructuring activities, and (iv) the current availability under our U.S.

line of credit totaling $21.4 million (Refer to Note 11 of the consolidated financial statements for further details regarding our financing arrangements) will be sufficient to fund our:

(i) foreseeable business needs, (ii) restructuring activities, (iii) capital expenditures, (iv) commitments, (v) contractual obligations, (vi) and income tax payments.

As of April 27, 2025, our cash and cash equivalents (“cash") totaled $5.6 million, a decrease of $4.4 million compared with cash of $10.0 million as of April 28, 2024.

This decrease was primarily due to:

(i) net cash used in operating activities totaling $17.7 million and (ii) capital expenditures of $2.9 million that were partially offset by net borrowings from our lines of credit totaling $12.7 million and proceeds from the sale of property, plant, and equipment totaling $1.9 million, related to our restructuring activities.

Our net cash used in operating activities was $17.7 million during fiscal 2025, an increase of $9.5 million compared with net cash used in operating activities of $8.2 million during fiscal 2024.

This trend mostly reflects:

(i) a significant decrease in cash earnings related to our recent restructuring activities, (ii) an increase in inventory purchases to maintain an appropriate level of inventory to accommodate our customers during the company's restructuring activities as described in the section titled "-Segment Analysis-Mattress Fabrics Segment-Restructuring Activities," and (iii) a decrease in cash flow from accounts receivable primarily due to longer payment trends related to a higher mix of customers with longer payment terms, partially offset by an increase in accounts payable due to an increase in inventory purchases from significant vendors who extended their payment terms during fiscal 2025 compared with fiscal 2024.

Our cash balance may be adversely affected by factors beyond our control, such as:

(i) recent customer demand trends affecting sales, (ii) increased tariffs or other changes in U.S.

trade policy related to imported products, (iii) supply chain disruptions, (iv) rising interest rates and inflation, and (v) geopolitical events (including wars in Ukraine and the Middle East).

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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Dividend Program

On June 29, 2022 (fiscal 2023), our board of directors announced the decision to suspend the company’s quarterly cash dividend.

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 was in the company’s best interest to support future growth and the long-term interests of our shareholders.

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We will continue to reassess our dividend policy each quarter.

Future dividend payments will depend on earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors, including alternative investment opportunities.

Common Stock Repurchases

Future dividend payments will depend on earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors.

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 repurchased 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.

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.

During fiscal 2025 and fiscal 2024, we did not repurchase any shares of our common stock.

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

As of April 27, 2025, $3.2 million was 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 first quarter of fiscal 2026.

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Accounts Receivable

Accounts receivable as of April 28, 2024, were $21.1 million, a decrease of $3.6 million, or 14.7%, compared with $24.8 million as of April 30, 2023.

This trend reflects a decrease in net sales during the fourth quarter of fiscal 2024 compared with the fourth quarter of fiscal 2023.

Net sales for the fourth quarter of fiscal 2024 were $49.5 million, a decrease of $11.9 million, or 19.4%, compared with net sales of $61.4 million during the fourth quarter of fiscal 2023.

See the Executive Summary for section titled “Net Sales” of this Item 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION for further discussion regarding the decline in net sales.

Days’ sales outstanding were 36 days and 35 days for the fourth quarter of fiscal 2024 and fiscal 2023, respectively.

Inventories as of April 28, 2024, were $44.8 million, which is comparable with $45.1 million as of April 30, 2023.

This trend represents a $2.2 million decrease in inventory related to the upholstery fabrics segment as a result of the decrease in net sales during the fourth quarter of fiscal 2024, compared with the fourth quarter of fiscal 2023.

Upholstery fabrics net sales during the fourth quarter of fiscal 2024 were $23.8 million, a decrease of 22.6% compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.

The decrease in inventory related to the upholstery fabrics segment was partially offset by a $2.0 million increase in inventory related to the mattress fabrics segment.

The increase in inventory related to the mattress fabrics segment primarily reflects lower than anticipated demand trends in relation to inventory purchases during the fourth quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023.

Mattress fabrics net sales during the fourth quarter of fiscal 2024 were $25.8 million, a decrease of 16.1%, compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.

Accounts receivable as of April 27, 2025, were $21.8 million, a modest increase of $706,000, or 3.3%, compared with $21.1 million as of April 28, 2024.

This trend reflects a modest increase in accounts receivable associated with our mattress fabrics segment due mostly to an increase in net sales during the fourth quarter of fiscal 2025 of 5.3%, compared with the fourth quarter of fiscal 2024, mostly offset by a modest decrease in accounts receivable associated with our upholstery fabrics segment due to a decrease in net sales during the fourth quarter of fiscal 2025 of 8.9%, compared with the fourth quarter of fiscal 2024.

The impact of the decrease in net sales on accounts receivable was mostly offset by longer payment trends during the fourth quarter of fiscal 2025, compared with the fourth quarter of fiscal 2024, resulting from a higher sales mix with customers who had longer credit terms.

Days’ sales outstanding on a consolidated basis were 40 days and 36 days for the fourth quarter of fiscal 2025 and fiscal 2024, respectively.

Inventories as of April 27, 2025, were $49.3 million, an increase of $4.5 million, or 10.0%, compared with $44.8 million as of April 28, 2024.

This increase in inventory represents:

(i) purchases of inventory needed to maintain an appropriate level of inventory in connection with the restructuring activities announced on May 1, 2024, as described in the section titled "-Segment Analysis-Mattress Fabrics Segment-Segment Assets", (ii) a non-cash inventory credit totaling $1.7 million regarding a change in accounting estimate related to our finished goods inventory markdown reserves for both our mattress fabrics and upholstery fabrics segments (see Note 1 of the consolidated financial statements for assessment made and conclusions reached as of April 27, 2025), which such increase was partially offset by a decrease in inventory related to our upholstery fabrics segment that resulted from a decrease in net sales during the fourth quarter of fiscal 2025 of 8.9%, compared with the fourth quarter of fiscal 2024.

Inventory turns were 3.3 for the fourth quarter of fiscal 2025, compared with 3.9 for the fourth quarter of fiscal 2024.

Accounts Payable-Trade

Accounts payable - trade were $25.6 million as of April 28, 2024, a decrease of $3.8 million, or 13.0%, compared with $29.4 million as of April 30, 2023.

The decrease in accounts payable as of April 28, 2024, compared to April 30, 2023, is mostly due to lower inventory

purchases in both the U.S.

and China resulting from weaker customer demand in fourth quarter of fiscal 2024 as compared with the fourth quarter of fiscal 2023.

Accounts payable - trade were $27.3 million as of April 27, 2025, an increase of $1.7 million, or 6.7%, compared with $25.6 million as of April 28, 2024.

This trend mostly represents an increase in inventory purchases with significant vendors who extended credit terms during fiscal 2025, as compared with fiscal 2024.

Financing Arrangements, Commitments and Contingencies, and Contractual Obligations

Revolving Credit Agreements

Currently, we have revolving credit agreements with banks for our U.S.

Currently, we have line of credit agreements with banks related to our U.S.

parent company and our operations located in China.

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

We had outstanding borrowings associated with our line of credit agreements totaling $12.7 million, of which $8.1 million and $4.6 million were reported in line of credit-current and line of credit-long-term, respectively, on the April 27, 2025 Consolidated Balance Sheet.

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

As of April 27, 2025, 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.

Refer to Note 11 of the consolidated financial statements for further disclosures regarding our line of credit agreements, which includes a Third Amendment to our U.S.

revolving credit agreement effective June 12, 2025.

Refer to Note 13 of the consolidated financial statements for disclosure of our lease obligations, which includes a five-year maturity schedule.

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As of April 27, 2025, and April 28, 2024, we had total amounts due regarding capital expenditures totaling $23,000 and $343,000, respectively, which pertained to outstanding vendor invoices, none of which were financed.

As of April 27, 2025, we had open purchase commitments to acquire equipment for our mattress fabrics operations totaling $117,000.

Uncertain Income Tax Positions

As of April 28, 2024, we had $1.3 million of total gross unrecognized tax benefits, which primarily relate to double taxation under applicable income tax treaties with foreign tax jurisdictions.

As of April 27, 2025, we had $790,000 of total gross unrecognized tax benefits, which primarily relate to taxation under applicable income tax treaties with foreign tax jurisdictions.

The outcome of these income tax uncertainties is dependent upon various matters including tax examinations, legal proceedings, competent authority proceedings, changes in regulatory tax laws, or interpretations of those tax laws, or expiration of statutes of limitation.

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Capital expenditures on a cash basis totaled $2.9 million and $3.7 million during fiscal 2025 and fiscal 2024, respectively.

Capital expenditures during fiscal 2024 and fiscal 2023 mostly related to our mattress fabrics segment and represent a maintenance level of capital spending with a strategic focus on capital projects that will increase efficiencies and improve the quality of our products.

Depreciation expense was $6.5 million during fiscal 2024, compared with $6.8 million during fiscal 2023.

Depreciation expense for fiscal 2024 and fiscal 2023 mostly related to our mattress fabrics segment.

Based on current expectations, capital spending for fiscal 2025 is projected to be approximately $4.5 million and will center on capital projects that will increase efficiencies and improve the quality of our products.

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

These levels of capital spending reflect reduced capital spending during the current unfavorable macro-economic conditions associated with the home furnishings and bedding industries.

Depreciation expense was $6.8 million during fiscal 2025, compared with $6.5 million for fiscal 2024, and was mostly related to our mattress fabrics segment for both periods.

In addition, for 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 the closure of our Property located in Quebec, Canada.

This $1.3 million of additional depreciation expense was classified as restructuring expense in the fiscal 2025 Consolidated Statement of Net Loss.

Based on current expectations, capital spending for fiscal 2026 is projected to be comparable to fiscal 2025 and will center on capital projects that will increase efficiencies, improve the quality of our products, and facilitate future growth.

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

Handling Costs

We record warehousing costs in SG&A expenses.

These costs were $4.6 million during fiscal 2024 and $4.2 million during fiscal 2023.

Warehousing costs include the operating expenses of our various finished goods distribution centers, such as personnel costs, utilities, building rent and material handling equipment, and lease expense.

Handling costs were $4.6 million during each of fiscal 2025 and fiscal 2024.

Warehousing costs include the operating expenses of our various finished goods distribution centers, such as personnel costs, utilities, building rent, material handling equipment, and lease expense.

Had these costs been included in cost of sales, gross profit would have been $20.4 million, or 9.6% of net sales, during fiscal 2025, and $23.3 million, or 10.3% of net sales, during fiscal 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 increases on to customers.

During fiscal 2023 and continuing through fiscal 2024, raw material costs started to decline due to slowing global demand;

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

Inflationary pressures also affected consumer spending during fiscal 2023 and continued through fiscal 2024, 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 2023 and fiscal 2024.

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

A meaningful rise in raw material, utility, energy or other costs, as well as broader economic inflation, could materially and adversely affect our operating results.

Competitive market dynamics have traditionally constrained our ability to fully offset such cost increases through price adjustments to customers.

In fiscal 2023 and 2024, raw material prices declined, primarily due to lower oil prices and softening global demand.

However, both years were marked by persistent challenges associated with elevated labor costs and limited labor availability.

While raw material and labor costs stabilized through fiscal 2024 and the first half of fiscal 2025, recent developments such as global trade negotiations and the implementation of new tariffs and import restrictions beginning in the fourth quarter of fiscal 2025 have begun to influence industry pricing structures and supply chain patterns.

These evolving conditions are expected to place upward pressure on our raw material costs.

In addition, energy prices have demonstrated substantial volatility in recent fiscal years and continue to represent an unpredictable element of our cost structure.

We recently initiated price increases designed to mitigate the impacts of recent tariff actions affecting products imported into the U.S., including those imported from China.

While the majority of these price increases will begin to phase in and become effective as of the second quarter of fiscal 2026, the above-referenced dynamics may ultimately lead to higher input costs, with potential adverse implications for our financial performance.

Further, persistent inflationary pressures significantly curtailed consumer spending during fiscal 2023, with effects extending into fiscal 2024 and 2025.

This economic environment contributed to a broader slowdown in both the mattress and residential home furnishings markets, leading to lower demand from home furnishings manufacturers for our mattress fabrics and residential upholstery fabrics across this period.

The duration and future impact of these trends remain uncertain, and it is difficult to predict how inflationary conditions may continue to influence consumer behavior and the broader economic cycle for home furnishings products over the near and long term.

Critical Accounting Estimates

generally accepted accounting principles require us to make estimates and assumptions that affect our reported amounts in the consolidated financial statements and accompanying notes.

Our estimates are based on (i) currently known facts and circumstances, (ii) prior experience, (iii) assessments of probability, (iv) forecasted financial information, and (v) assumptions that management believes to be reasonable but that are inherently uncertain and unpredictable.

Our estimates are based on:

(i) currently known facts and circumstances, (ii) prior experience, (iii) assessments of probability, (iv) forecasted financial information, and (v) assumptions that management believes to be reasonable but that are inherently uncertain and unpredictable.

We use our best judgment when measuring these estimates, and if warranted, use external advice.

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As of April 27, 2025, we believe the following list represents our critical accounting estimates that have or are reasonably likely to have a material effect on our financial condition or results of operations.

For a discussion of all our significant accounting policies, including our critical accounting policies, refer to Note 1 of the consolidated financial statements.

Refer to Note 1 of the consolidated financial statements for discussion of all of our significant accounting policies, including our critical accounting policies.

Inventory Valuation

We operate as a “make-to-order” and “make-to-stock” business.

Although management closely monitors demand for each product category to decide which patterns and styles to hold in inventory, the availability of low-cost imported products and shifts in consumer preferences and styles subject the company to markdowns of inventory.

Although management closely monitors demand for each product category to decide which patterns and styles to hold in inventory, the availability of low-cost imported products, shifts in consumer preferences and styles, and increased tariffs or other changes in U.S.

trade policy related to imported products subject the company to markdowns of inventory.

Management continually examines inventory to determine if there are indicators that the carrying value exceeds its net realizable value.

Historical experience has shown that the most significant indicators that would require inventory markdowns are the age of the inventory and the planned discontinuance of certain fabric patterns.

As a result, we provide inventory valuation markdowns based upon set percentages for inventory aging categories of six, nine, twelve, and fifteen-months that are determined based on historical experience and judgment.

Also, we provide inventory valuation write-downs based on the planned discontinuation of certain products based on current market values at the time of assessment compared with their current carrying values.

As a result, we provide inventory valuation markdowns based upon established percentages associated with the age of inventory that are continually evaluated and determined based on historical experience and judgment.

Also, we provide inventory valuation markdowns associated with restructuring activities and on the planned discontinuance of certain patterns based on the current market values at that time of assessment as compared to their current carrying values.

While management believes that adequate markdowns for inventory have been made in the consolidated financial statements, significant unanticipated changes in demand or changes in consumer tastes and preferences could result in additional inventory markdowns in the future.

During the fourth quarter of fiscal 2025, we assessed the percentages associated with the age of our inventory and the related aging categories.

This assessment was based on the change in current market trends related to extended life cycles for finished goods inventory.

As a result of our assessment, we recorded a non-cash inventory credit of $1.7 million due to a change in accounting estimate related to the finished goods inventory markdown reserve.

The $1.7 million non-cash inventory credit was recorded within cost of sales in our fiscal 2025 Consolidated Statement of Net Loss.

Based on the above policy, we recorded a non-cash inventory credit of $(2.4) million and $(1.6) million, respectively, within the fiscal 2025 and fiscal 2024 Consolidated Statements of Net Loss.

As of April 27, 2025, and April 28, 2024, the reserve for inventory markdowns was $7.8 million and $9.6 million, respectively.

Refer to Note 4 of the consolidated financial statements for additional disclosures regarding our assessments and conclusions reached regarding the subsequent measurement of inventory.

Income Taxes – Valuation Allowance

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Determining the probability of the vesting of our performance-based restricted stock units requires judgment, including assumptions used to forecast future financial results.

While our forecasts of future financial results represent management’s best estimates, these involve inherent uncertainties.

While our forecasts of future financial results represent management’s best estimates, these forecasts involve inherent uncertainties.

As a result, if we revised our assumptions and estimates during the vesting period, our stock-based compensation expense could be materially different than previously expected.

We estimate the fair value of our performance-based restricted stock units that have a market condition using a Monte Carlo valuation model.

The Monte Carlo valuation model incorporates inputs and complex assumptions that include (i) the closing price of our common stock at the respective grant date, (ii) expected volatility of our common stock, (iii) expected volatility and correlation coefficient of our peer companies that are approved by the Compensation Committee of our board of directors, (iv) risk-free interest rate, and (v) dividend yield.

The Monte Carlo valuation model incorporates inputs and complex assumptions that include:

(i) the closing price of our common stock at the respective grant date, (ii) expected volatility of our common stock, (iii) expected volatility and correlation coefficient of our peer companies that are approved by the Compensation Committee of our board of directors, (iv) risk-free interest rate, and (v) dividend yield.

The determination of the inputs and complex assumptions used, and the application of the Monte Carlo valuation model, requires significant judgment by management and advice from an external advisor.

We recorded $915,000, $1.1 million, and $1.1 million of compensation expense within selling, general, and administrative expense for our equity-based awards in fiscal 2024, 2023, and 2022, respectively.

We recorded $650,000, and $915,000 of compensation expense within selling, general, and administrative expense for our equity-based awards in fiscal 2025 and 2024, respectively.

Adoption of New Accounting Pronouncements

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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-K

Item 7. Management’s Discussion and Analysis