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Item 7. Management’s Discussion and Analysis

2026-07-17 compared with 2025-07-11 · 383 added, 355 removed, 178 unchanged (81% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We have prepared this Management’s Discussion and Analysis as an aid to understanding our financial results.

We have prepared this Management’s Discussion and Analysis of Financial Condition and Results of Operations as an aid to understanding our financial results.

It should be read in conjunction with the consolidated financial statements and notes and other exhibits included elsewhere in this report.

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

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

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.”

Fiscal 2026, 2025, and 2024 comprised 53-week, 52-week, and 52-week periods, respectively.

We refer to the year ended May 3, 2026 as “fiscal 2026,” the year ended April 27, 2025 as “fiscal 2025” and the year ended April 28, 2024 as “fiscal 2024.”

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 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;

bedding and upholstery.

On April 24, 2025, the company announced a strategic transformation of its operating model to combine certain activities within the bedding and upholstery segments and create one integrated Culp-branded business.

This strategic transformation was completed by the end of fiscal 2026.

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

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

In the first quarter of fiscal 2025, our board of directors made a decision to:

(1) consolidate the company's North American bedding 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 company's Property located in Quebec, Canada to the company's manufacturing facility located in Stokesdale, North Carolina;

(3) transition the bedding segment's weaving operation to a strategic sourcing model through the company's long-standing supply partners;

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

See Note 10 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.

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.

See Note 10 to the consolidated financial statements for further details regarding these restructuring activities.

All the above restructuring activities were completed as of April 30, 2025.

See Notes 7 and 8 to the consolidated financial statements for further details regarding the sale of the Property and determination of fair value.

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

As of May 3, 2026, we had upholstery operations located in Stokesdale, North Carolina, and Shanghai, China, as well as a wholly-owned subsidiary, Culp Fabrics Vietnam Limited, which has an administrative office and showroom located in Ho Chi Minh City, Vietnam.

Our Vietnam office enhances our strategic sourcing capabilities and further diversifies our supply chain in Asia, while our recently added showroom facilitates better product exposure with our growing customer base there.

During fiscal 2026, as part of the strategic transformation noted above, we closed a leased upholstery facility located in Burlington, North Carolina, and transitioned its distribution activities to a shared management model within our owned facility located in Stokesdale, North Carolina.

Our Stokesdale, North Carolina facility had historically been operated solely by our bedding segment.

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

Additionally, the upholstery segment includes Read Window Products, LLC ("Read"), a wholly owned subsidiary that provides 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.

Read's operations were previously conducted at a leased facility in Knoxville, Tennessee, and also within a leased upholstery facility in Burlington, North Carolina, but these operations were moved to our Stokesdale, North Carolina, facility in fiscal 2026 as part of the strategic transformation noted above.

Executive Summary

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.

Consolidated Results of Operations

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Selling, general, and administrative expenses

Restructuring expense

Restructuring credit (expense)

Loss from operations

2 unchanged sentences

Income tax expense

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.

Our consolidated net sales decreased by 4.6% in fiscal 2026 compared with a year ago, with bedding net sales increasing 2.4% and upholstery net sales decreasing 12.5%.

The increase in net sales in our bedding business was driven by higher demand for our products in the fourth quarter, particularly for sewn mattress covers.

Higher sales for the year were partially offset by lower sales for the first nine months of fiscal 2026 due to muted demand across the bedding industry and related challenges from weaker consumer spending and broader macroeconomic pressures.

Despite the market headwinds, we continue to see customers recognize the strategic value of our global footprint and strong U.S.

manufacturing capabilities, particularly as the current trade and tariff environment drives increased scrutiny of supply chain cost structure and reliability.

The decline in net sales in our upholstery business primarily reflects softness in the home furnishings market and its impact on residential upholstery demand, driven largely by depressed housing market trends.

In addition, broader macroeconomic pressures have dampened project activity in the commercial and hospitality fabric markets we serve.

These factors, as well as incremental pressure on customer demand resulting from ongoing tariff volatility and rising oil prices, affected upholstery sales in fiscal 2026.

While the markets we serve continue to face near-term challenges, we believe we are well positioned for future growth.

The recent restructuring of our bedding platform, along with the completion of several additional initiatives in our upholstery segment during the second half of fiscal 2026 (including the integration of our U.S.

upholstery distribution and window treatment operations and the consolidation of our production footprint in China), is expected to strengthen our market position and operating foundation.

Our consolidated gross profit was flat in fiscal 2026 compared with a year ago, with bedding gross profit increasing by 34.9% and upholstery gross profit decreasing by 17.9%.

Gross profit margin improved 60 basis points, from 11.8% in fiscal 2025 to 12.4% in fiscal 2026.

Overall gross profitability for the year benefited from the efficiencies and cost reductions we have generated from completion of our fiscal 2025 restructuring and fiscal 2026 integration initiatives, but was adversely affected by lower sales volumes and unfavorable foreign exchange impacts related to our China upholstery operations.

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 $(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.

Overall, our consolidated loss before income taxes was $8.3 million for fiscal 2026, compared with a loss before income taxes of $18.7 million for the same period a year ago.

Operating performance for fiscal 2026, as compared to the prior year, improved as a result of lower restructuring and restructuring-related expenses in fiscal 2026, with a $1.4 million restructuring credit in fiscal 2026, as compared to $9.4 million in restructuring and

restructuring-related expenses in fiscal 2025.

The restructuring and restructuring-related charges in fiscal 2025 were driven by the fiscal 2025 restructuring primarily associated with our bedding segment, while the restructuring credit in fiscal 2026 was driven by a gain on sale in connection with the sale of our Canadian property as part of the fiscal 2025 restructuring.

The restructuring credit in fiscal 2026 was partially offset by restructuring and restructuring related charges associated with our fiscal 2026 integration initiatives.

Beyond the positive impact from lower restructuring and restructuring-related charges, lower sales and other factors adversely affected our operating performance during fiscal 2026, but we benefited throughout the year from the lower costs and efficiencies resulting from our recently restructured bedding manufacturing platform.

Our operating performance also benefited from our additional actions to reduce selling, general and administrative expenses and implement price increases to mitigate tariff impacts.

Further, the integration of our domestic upholstery distribution and Read window treatment operations into our owned North Carolina facility, along with the reduction of our facility footprint in China, began to yield some benefits during the second half of fiscal 2026.

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

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 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.

We recorded income tax expense of $1.9 million, or (23.2)% of loss before income taxes, for fiscal 2026, compared with income tax expense of $392,000, or (2.1)% of loss before income taxes, for fiscal 2025.

Our consolidated effective income tax rates during fiscal 2026 and fiscal 2025 were adversely affected by the mix of earnings between our U.S.

operations and foreign subsidiaries.

During fiscal 2026, our taxable income stemmed from our operations located in China and a gain on sale of Property located in Canada during fiscal 2026 (see Notes 8 and 10 of the consolidated financial statements for further details), which jurisdictions have higher income tax rates than the U.S.

During fiscal 2025, our taxable income stemmed from our operations located in China, partially offset by a pre-tax loss incurred in Canada due to our restructuring activities during fiscal 2025.

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

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

deferred income tax assets during both fiscal 2026 and fiscal 2025, respectively.

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

operations totaling $(15.1) million and $(18.4) million that were incurred during fiscal 2026 and fiscal 2025, respectively.

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.

Lastly, our consolidated effective income tax rates in fiscal 2026 and 2025 were also adversely affected 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 $(804,000) and $(1.6) million that were incurred during fiscal 2026 and fiscal 2025, respectively.

During fiscal 2026, we incurred a consolidated pre-tax loss of $(8.3) million, compared with a significantly higher pre-tax loss of $(18.7) million incurred during fiscal 2025.

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 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.

federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during fiscal 2026, as compared with fiscal 2025.

During fiscal 2026 and fiscal 2025, we had income tax payments totaling $3.6 million and $2.3 million, respectively, which consist of 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 and Canada.

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 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.

As of May 3, 2026, our cash and cash equivalents (“cash") totaled $8.3 million, an increase of $2.7 million compared with cash of $5.6 million as of April 27, 2025.

This increase was mostly due to:

(i) net borrowings on lines of credit totaling $5.7 million;

and (ii) proceeds from notes receivable and the sale of property, plant, and equipment totaling $6.2 million, which mostly relates to the sale of Property located in Quebec, Canada, partially offset by net cash used in operating activities of $(9.4) million.

Our net cash used in operating activities was $(9.4) million during fiscal 2026, an improvement of $8.3 million compared with net cash used in operating activities of $(17.7) million during fiscal 2025.

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.

(i) a decrease in cash losses due to savings associated with our restructuring activities;

(ii) an increase in cash flow from accounts receivable due to faster payment trends with key bedding customers that had shorter credit terms and utilized more discounts, as well as a substantial payment from a significant customer within the upholstery segment during the fourth quarter of fiscal 2026, which payment did not occur during the fourth quarter of fiscal 2025;

(iii) an increase in cash flow from a reduction of inventory purchases due to improved alignment with current customer demand trends;

partially offset by a decrease in cash flow from:

(i) a decrease in accounts payable from a reduction of inventory purchases due to improved alignment with current customer demand trends and (ii) an increase in income tax payments stemming from the gain on the sale of Property located in Quebec, Canada during fiscal 2026.

As of May 3, 2026, we had outstanding borrowings totaling $19.1 million under our line of credit agreements, of which $12.1 million and $7.0 million were reported in lines of credit-current and lines of credit-long term, respectively, within the May 3, 2026, Consolidated Balance Sheet.

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

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Selling, general and administrative expenses

Restructuring expense

Restructuring credit (expense)

Loss from operations

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Segment Analysis

Mattress Fabrics Segment

Twelve Months Ended

(dollars in thousands)

Selling, general and administrative expenses

Restructuring expense

Loss from operations

Operating margin

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 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

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;

(2) move a portion of the knitting and finishing capacity from the company's manufacturing facility located in Quebec, Canada, to the company's manufacturing facility located in Stokesdale, North Carolina;

(3) transition the mattress fabrics segment's weaving operation to a strategic sourcing model through the company's long standing supply partners;

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

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:

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 segment basis for the purpose of evaluating financial and operating performance and allocation of resources to the individual segments noted above.

Beginning in the first quarter of fiscal 2026, our CODM decided to use net sales and gross profit, excluding items that are not expected to occur on a regular basis (e.g., restructuring activities), as the primary measure of segment profit or loss.

Previously, segment performance was primarily evaluated based on net sales and income (loss) from operations before unallocated corporate expenses and other items that are not expected to occur on a regular basis (e.g., restructuring activities).

This change was made to align with internal management reporting and the decision-making processes affected by the strategic transformation of the company's operating model announced on April 24, 2025, which combined certain activities within the bedding and upholstery segments and created one integrated Culp-branded business.

The CODM evaluates segment performance based on:

(i) net sales, (ii) cost of sales, (iii) gross profit excluding items that are not expected to occur on a regular basis (i.e., restructuring related charges and credits), (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.

Intangible assets are not included in segment assets, as these assets are not used by the CODM to evaluate the respective segment’s operating performance and allocate resources to the individual segments.

Bedding Segment

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.

Bedding sales increased by 2.4% in fiscal 2026 compared to the prior year.

This increase in net sales was driven by higher demand for our products in the fourth quarter, particularly for sewn mattress covers, partially offset by lower sales for the first nine months of fiscal 2026 due to muted demand across the bedding industry and related challenges from weaker consumer spending and broader macroeconomic pressures.

Despite the continued market headwinds, we secured new programs with major customers across all product categories and expanded our share of available business in targeted channels in fiscal 2026.

Looking ahead, we see encouraging indications that the bedding market may be stabilizing to a degree, with potential demand improvement driven by product replacement cycles.

We remain focused on expanding placements with key customers and increasing market share to drive revenue growth, while continuing to navigate sales pressure stemming from the current macroeconomic environment.

We believe that meaningful future sales growth will depend on a broader industry recovery, improved economic conditions, and greater global trade stability.

Ongoing geopolitical risks, including conflicts in Ukraine and the Middle East, also have the potential to disrupt global markets and adversely affect sales.

Bedding gross profit increased by 34.9% in fiscal 2026 compared to the prior year.

The improvement in gross profit was due primarily to cost reductions and efficiency gains achieved through the restructuring of our bedding segment in fiscal 2025, as well as higher sales, pricing actions, and improved selling margins.

Segment Assets

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Right of use assets

Total mattress fabrics segment assets

Total bedding segment assets

Refer to Note 19 of the consolidated financial statements for disclosures regarding determination of our segment assets.

Accounts Receivable

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.

Accounts receivable was relatively flat as of May 3, 2026, compared with April 27, 2025.

This trend represents an increase in net sales of 12.5% during the fourth quarter of fiscal 2026, as compared with the fourth quarter of fiscal 2025, offset by faster payment trends with key bedding customers that had shorter credit terms and utilized more discounts during the fourth quarter of fiscal 2026, compared with the same period a year ago.

Accordingly, days’ sales outstanding was 32 days during the fourth quarter of fiscal 2026, compared with 35 days during the fourth quarter of fiscal 2025.

As of May 3, 2026, inventory decreased 4.6% compared with April 27, 2025.

This decrease was primarily due to improved alignment of inventory purchases with current customer demand trends and a strategic focus on reducing aged inventory.

Also, this trend reflects an increase in consumer demand during the fourth quarter of fiscal 2026, which led to a 12.5% increase in net sales during the fourth

quarter of fiscal 2026, as compared with the same period a year ago.

Inventory turns were 3.3 for the fourth quarter of fiscal 2026, compared with 2.9 for the fourth quarter of fiscal 2025.

Property, Plant, & Equipment

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."

Property, plant, and equipment has steadily decreased due to reduced capital spending stemming from current unfavorable macroeconomic conditions within the home furnishings and bedding industries, as well as restructuring initiatives commencing at the beginning of fiscal 2025 and continuing through the end of fiscal 2026.

See Note 10 to the consolidated financial statements for further details and description of our restructuring activities.

The $19.8 million as of May 3, 2026, represents property, plant, and equipment of $18.9 million and $825,000 located in the U.S.

and Haiti, respectively.

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.

As of April 27, 2025, we classified certain assets as held for sale totaling $2.2 million, which mostly related to the Property associated with the closure of our operation located in Quebec, Canada.

During the first quarter of fiscal 2026, we sold the Property and recognized a gain from this sale totaling $4.0 million that was classified within restructuring credit in the fiscal 2026 Consolidated Statement of Net Loss.

As a result, the bedding segment did not have any assets classified as held for sale as of May 3, 2026.

Refer to Note 8 of the consolidated financial statements for further details.

Right of Use Assets

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.

Right of use assets have steadily decreased due to the restructuring initiatives announced on May 1, 2024, which continued through the end of fiscal 2026.

In connection with these restructuring initiatives, right of use assets decreased due mostly to the termination of an agreement to lease a facility located in Ouanaminthe, Haiti, in fiscal 2025, and the closure of two leased facilities located in Quebec, Canada, in fiscal 2026.

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.

Upholstery Fabrics Segment

Upholstery Segment

Twelve Months Ended

(dollars in thousands)

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

Upholstery net sales decreased by 12.5% in fiscal 2026 compared to the prior year.

Macro conditions in the upholstery market remain unsettled, with depressed housing market trends driving continued softness in the home furnishing market and adversely affecting demand in the company's residential fabric business.

In addition, broader macroeconomic pressures have dampened project activity in the commercial and hospitality fabric markets we serve, including in our Read business, where sales for fiscal 2026 declined by $5.4 million as compared to the prior year.

The decline in upholstery sales for fiscal 2026, as compared to fiscal 2025, reflects these factors as well as incremental pressure on customer demand resulting from ongoing tariff volatility and rising oil prices.

Looking forward, we expect conditions in the home furnishings market to remain uncertain in the near term.

However, we believe the recent scale and efficiency enhancements resulting from the completion of integration initiatives within our upholstery segment, coupled with our product innovation capabilities and multi-location manufacturing and sourcing platform, position our upholstery segment to accelerate sales growth if and when demand stabilizes.

The potential impact of ongoing geopolitical developments, including conflicts in Ukraine and the Middle East, remains uncertain and depends on factors outside our control.

At this time, we cannot reasonably estimate the effect of these events on the upholstery segment.

However, an escalation of geopolitical tensions, including potential shipping disruptions related to conflicts in the Middle East, could

adversely affect our operations, as well as those of our suppliers and customers, and could negatively impact the global economy and our financial performance.

Twelve Months Ended

1 unchanged sentence

Gross profit margin

Selling, general and administrative expenses

Restructuring expense

Income from operations

Operating margin

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

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 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

Upholstery Fabrics Finishing Operation

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

Facility consolidation and relocation expenses

Impairment and loss on sale of equipment

Loss on disposal and markdowns of inventory

Other associated costs

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

(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.

Upholstery gross profit decreased by 17.9% in fiscal 2026 compared to the prior year.

The decline in gross profit within our upholstery segment during fiscal 2026, as compared to fiscal 2025, was primarily attributable to lower comparable sales, as well as unfavorable foreign exchange impacts associated with our operations in China.

This was partially offset by our improving cost structure, which allowed us to maintain solid gross margins despite challenging market conditions affecting the home furnishings industry, including both residential and commercial upholstery channels.

The residential home furnishings market continues to experience reduced demand driven by shifts in consumer spending patterns, volatility related to global trade and tariffs, inflationary pressures, lower home sales activity, and other macroeconomic factors affecting discretionary consumer purchases.

Demand also remains soft in the commercial and hospitality markets as a result of macroeconomic pressures that continue to challenge travel and leisure spending and delay project activity.

As a result, we expect the current low-demand environment for both residential and commercial / hospitality upholstery fabrics to continue to adversely affect gross profit until market conditions improve.

During the second half of fiscal 2026, we completed the integration of our U.S.

upholstery distribution and window treatment operations into our owned facility in Stokesdale, North Carolina, which is expected to enhance operating efficiency and improve this segment's profitability profile.

In addition, we implemented further cost-reduction and efficiency initiatives in fiscal 2026, including the rationalization of our production and distribution footprint in China.

We continue to monitor demand trends closely and remain prepared to implement additional operational adjustments as necessary to align our cost structure in this segment with market conditions, while continuing to provide consistent service levels to customers.

Segment Assets

4 unchanged sentences

Right of use assets

Total upholstery fabrics segment assets

Total upholstery segment assets

Accounts Receivable

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 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).

As of May 3, 2026, accounts receivable decreased by 13.8% compared with April 27, 2025.

This decrease mostly represents a substantial payment from a significant customer during the fourth quarter of fiscal 2026, which payment did not occur during the fourth quarter of fiscal 2025.

Accordingly, days' sales outstanding decreased to 41 days during the fourth quarter of fiscal 2026, compared with 46 days during the fourth quarter of fiscal 2025.

In addition, this decrease is attributable to a 2.5% decline in net sales during the fourth quarter of fiscal 2026, compared with the fourth quarter fiscal 2025.

As of May 3, 2026, inventory slightly decreased by 1.7% during fiscal 2026, as compared with fiscal 2025.

This decrease in inventory was primarily due to improved alignment of inventory purchases with current customer demand trends and a strategic focus on reducing aged inventory.

Inventory turns were 4.3 during the fourth quarter of fiscal 2026, compared with 4.0 during the fourth quarter of fiscal 2025.

Property, Plant, & Equipment

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.

Property, plant, and equipment has steadily decreased due to reduced capital spending stemming from current unfavorable macroeconomic conditions within the home furnishings and residential furniture industries, as well as from our restructuring activities announced on April 24, 2025.

See Note 10 of the consolidated financial statements for further details and description of our restructuring activities.

The $708,000 as of May 3, 2026, represents property, plant, and equipment of $642,000, $37,000, and $29,000 located in the U.S., Vietnam, and Haiti, respectively.

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.

Right of Use Assets

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.

Right of use assets have steadily decreased due to the restructuring initiatives announced on April 24, 2025, which were completed by the end of fiscal 2026.

In connection with these restructuring initiatives, right of use assets decreased due mostly to the termination of lease agreements associated with upholstery facilities located in Burlington, North Carolina, and Knoxville, Tennessee, as well as one facility located in Shanghai, China.

The $496,000 as of May 3, 2026, represents right of use assets of $421,000 and $75,000 located in China and the U.S., respectively.

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.

Other Consolidated Income Statement Categories

2 unchanged sentences

Selling, general, and administrative expenses

Restructuring credit (expense)

Interest expense

Interest income

Restructuring expense - unallocated corporate

Other expense

Selling, General, and Administrative Expenses

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.

The decrease in selling, general, and administrative expenses during fiscal 2026, as compared with fiscal 2025, was primarily due to the cost reduction initiatives in connection with our restructuring activities in fiscal 2025 and fiscal 2026.

Also, additional SG&A expenses were incurred during fiscal 2026, as compared with fiscal 2025, as fiscal 2026 and 2025 represented 53-week and 52-week periods, respectively.

Restructuring Activities

Restructuring Activities Announced May 1, 2024

In the first quarter of fiscal 2025, our board of directors made a decision to:

(1) consolidate the company's North American bedding operations, including the closure and sale of the Property located in Quebec, Canada;

(2) move a portion of the knitting and finishing capacity from the company's Property located in Quebec, Canada to the company's manufacturing facility located in Stokesdale, North Carolina;

(3) transition the bedding segment's weaving operation to a strategic sourcing model through the company's long-standing supply partners;

(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;

as well as (5) reduce unallocated corporate and shared service expenses.

These restructuring activities were completed by the end of the second quarter of fiscal 2026, including the sale of Property located in Quebec, Canada.

Accordingly, we recorded a gain from the sale of this Property totaling $4.0 million that was classified within restructuring credit in the fiscal 2026 Consolidated Statement of Net Loss.

See Notes 7 and 8 of the consolidated financial statements for further details regarding the Sales Agreement associated with the sale of Property and determination of fair value.

Since the inception of this restructuring initiative, we have incurred cumulative restructuring and restructuring related charges totaling $5.3 million, most of which is related to the bedding segment.

This total $5.3 million consists of a $7.2 million cash restructuring charge, offset by a $(1.9) million non-cash restructuring credit.

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 combined certain activities within the bedding and upholstery segments and created one integrated Culp-branded business.

As part of this strategic transformation , we closed a leased facility located in Burlington, North Carolina and a leased facility located in Knoxville, Tennessee, and we transitioned their production and distribution activities to a shared management model within our owned facility located in Stokesdale, North Carolina, which had historically been operated solely by our bedding segment.

These restructuring activities were completed by the end of the fourth quarter of fiscal 2026.

Since the inception of this restructuring initiative, we have incurred restructuring and restructuring related charges totaling $2.7 million, of which $1.4 million represents a cash restructuring and related charge and $1.3 million represents a non-cash restructuring charge.

The following summarizes restructuring (credit) expense and restructuring related charges associated with the restructuring activities described above during fiscal years 2026 and 2025:

(dollars in thousands)

Net (gain) loss from the sale and impairment of property, plant, and equipment

Loss on disposal, valuation, and markdowns of inventory

Facility consolidation and relocation expenses

Impairment of intangible asset

Other associated costs

Employee termination benefits

Additional depreciation expense for shortened useful lives of equipment

Lease termination costs

Restructuring (credit) expense and restructuring related charges (1) (2)

(1 ) Of the total $(1.4) million net restructuring credit, a $(2.3) million credit and a $931,000 charge were classified within restructuring credit and cost of sales, respectively, in the fiscal 2026 Consolidated Statement of Net Loss.

Of the total $(1.4) million net restructuring credit and restructuring related charge, a credit of $(3.1) million and a charge of $1.7 million related to bedding and upholstery segments, respectively.

Of the total $(1.4) million net restructuring credit and restructuring related charge, a credit of $(3.4) million and a charge of $2.0 million related to the restructuring activities announced on May 1, 2024, and April 24, 2025, respectively.

(2) Of the total $9.4 million restructuring and restructuring related charge, $7.7 million and $1.6 million were classified within restructuring expense and cost of sales, respectively, in the fiscal 2025 Consolidated Statement of Net Loss.

Of the $9.4 million restructuring and restructuring related charge, $8.5 million, $540,000, and $290,000 related to the bedding segment, unallocated corporate, and the upholstery segment, respectively.

Of the total $9.3 million restructuring and restructuring related charge, $8.7 million and $676,000 related to restructuring activities announced on May 1, 2024, and April 24, 2025, respectively.

Interest Expense

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

The increase in interest expense during fiscal 2026, compared with fiscal 2025, reflects increased borrowings under line of credit agreements associated with our operations located in the U.S.

Interest Income

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 interest income during fiscal 2026, as compared with fiscal 2025, reflects interest income earned from a note receivable associated with the sale of Property that occurred at the beginning of the first quarter of fiscal 2026.

During fiscal 2026, interest income of $375,000 was earned from this note receivable, which was not earned during fiscal 2025.

Interest income was partially offset by lower average cash balances during fiscal 2026, as compared fiscal 2025.

Refer to Notes 7 and 10 of the consolidated financial statements for further details regarding our note receivable and our restructuring activities announced on May 1, 2024.

Other Expense, Net

The increase in other expense, net mostly represents less favorable foreign currency exchange rates experienced during fiscal 2026, resulting in a foreign exchange rate loss of $1.3 million, compared with a foreign currency exchange rate gain of $(117,000) during the

same period a year ago.

The $1.3 million foreign exchange rate loss incurred during fiscal 2026 was partially offset by $1.0 million in cash proceeds in connection with a resolution of a legal matter.

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

1 unchanged sentence

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

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.

During fiscal 2026, we incurred a foreign currency exchange rate loss of $1.4 million that was associated with our operations located in China.

This $1.4 million stems from less favorable foreign currency exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S.

dollar financial reporting amounts.

During 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.

The foreign exchange rate loss of $1.4 million described above was mostly non-cash and was partially offset by an income tax benefit of $1.2 million.

This income tax benefit of $1.2 million was associated with taxable foreign exchange rate losses based on less favorable foreign currency exchange rates applied against balance sheet accounts denominated in U.S.

dollars to determine the corresponding Chinese Renminbi local currency amounts.

The foreign 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 $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:

federal income tax rate

valuation allowance

foreign tax rate differential

income tax effects of Chinese foreign exchange gains

withholding taxes associated with foreign tax jurisdictions

uncertain income tax positions

state income taxes

stock-based compensation

consolidated effective income tax rate (2) (3) (4)

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

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.

The foreign exchange rate loss derived from our U.S.

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

We recorded income tax expense of $1.9 million, or (23.2)% of loss before income taxes, during fiscal 2026, compared with income tax expense of $392,000, or (2.1)% of loss before income taxes, during fiscal 2025.

Our consolidated effective income tax rates during fiscal 2026 and 2025 were adversely affected by the mix of earnings between our U.S.

operations and foreign subsidiaries.

During fiscal 2026, our taxable income stemmed from our operations located in China and a gain on sale of Property located in Canada during fiscal 2026 (See Notes 8 and 10 of the consolidated financial statements for further details), which jurisdictions have higher income tax rates than the U.S.

During fiscal 2025, our taxable income stemmed from our operations located in China (which have higher income tax rates than the U.S.), partially offset by a pre-tax loss incurred in Canada due to our restructuring activities during fiscal 2025.

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

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

deferred income tax assets during fiscal 2026 and 2025, 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) 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.

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.

Deferred Income Taxes – Valuation Allowance

We evaluate the realizability of our deferred income taxes to determine if a valuation allowance is required.

We assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified.

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

As of April 27, 2025, we evaluated the realizability of our U.S.

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

Based on our assessment, we determined we still have a recent history of significant cumulative U.S.

pre-tax losses, in that we experienced U.S.

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

In addition, we are currently expecting 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.

net deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S.

net deferred income tax assets totaling $26.3 million as of April 27, 2025.

Refer to Note 12 of the consolidated financial statements for additional disclosures regarding the valuation allowance against our U.S.

operations totaling $(15.1) million and $(18.4) million that were incurred during fiscal 2026 and 2025, respectively.

Lastly, our consolidated effective income tax rates in fiscal 2026 and 2025 were also adversely affected by 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 six 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 $(804,000) and $(1.6) million that were incurred during fiscal 2026 and 2025, respectively.

Refer to Note 12 of the consolidated financial statements for additional disclosures regarding our income taxes, including, without limitation, (i) 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;

(ii) the valuation allowance against our U.S.

net deferred income taxes;

Deferred Income Taxes – Undistributed Earnings from Foreign Subsidiaries

We assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S.

parent company, and whether we are required to 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.

The conclusion reached from our assessment is consistent with prior years.

Accordingly, as of April 27, 2025, we recorded a deferred income tax liability associated with our undistributed earnings from foreign subsidiaries of $5.2 million.

Refer to Note 12 of the consolidated financial statements for additional disclosures regarding our deferred income tax liability associated with the undistributed earnings from our foreign subsidiaries.

Uncertainty in Income Taxes

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

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

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.

United States federal and state income tax returns filed by us remain subject to examination for income tax years 2019 and subsequent.

Canadian federal income tax returns filed by us remain subject to examination for income tax years 2021 and subsequent.

Canadian provincial (Quebec) income tax returns filed by us remain subject to examination for income tax years 2021 and subsequent.

Income tax returns associated with our operations located in China are subject to examination for income tax year 2020 and subsequent.

Refer to Note 12 of the consolidated financial statements for disclosures and additional information regarding our uncertain income tax positions.

Income Taxes Paid

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)

United States Federal - Transition Tax

China - Income Taxes

Canada - Income Taxes

(iii) our uncertain income tax positions, and (iv) our income taxes paid (refunded) by jurisdiction for fiscal 2026 and 2025.

2025 compared with 2024

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Liquidity and Capital Resources

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.

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

As of May 3, 2026, we believe:

(i) our cash of $8.3 million, (ii) improvement in cash flow from operations stemming from expected cash savings from our recent restructuring activities, and (iii) the current availability under our lines of credit totaling $15.9 million, including $14.5 million in available borrowings under the ABL Facility and additional availability under our China credit agreements (Refer to Note 11 of the consolidated financial statements for further details regarding our financing arrangements) will be sufficient to fund our foreseeable business needs, capital expenditures, commitments, contractual obligations, and income tax payments.

As of May 3, 2026, our cash totaled $8.3 million, an increase of $2.7 million compared with cash of $5.6 million as of April 27, 2025.

This increase was mostly due to:

(i) net borrowings on lines of credit totaling $5.7 million;

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.

(i) a decrease in cash losses from savings associated with our restructuring activities announced on May 1, 2024, and April 24, 2025 (refer to the section titled "-- Segment Analysis -- Consolidated Other Income Statement Categories -- Restructuring Activities" for further details regarding our restructuring initiatives);

and (iii) an increase in cash flow from a reduction of inventory purchases due to improved alignment with current customer demand trends;

partially offset by a decrease in cash flow from:

As of May 3, 2026, we had outstanding borrowings totaling $19.1 million under our line of credit agreements, of which $12.1 million and $7.0 million were reported in lines of credit-current and line of credit-long term, respectively, on the May 3, 2026, Consolidated Balance Sheet.

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).

(i) recent customer demand trends affecting net 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 conflicts 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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Cayman Islands

Dividend Program

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.

Accordingly, we did not make any dividend payments during fiscal 2025, 2024 or fiscal 2023.

Our board of directors has sole authority to determine if and when we will declare future dividends, and on what terms.

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.

Common Stock Repurchase Program

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During fiscal 2026 and fiscal 2025, we did not repurchase any shares of our common stock.

As of April 27, 2025, $3.2 million was available for additional repurchases of our common stock.

As of May 3, 2026, $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 2027.

Dividend Program

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.

Accordingly, we did not make any dividend payments during fiscal 2026 or fiscal 2025.

Beginning in early 2025, the U.S.

government imposed tariffs under the International Emergency Economic Powers Act (“IEEPA”).

In February 2026, the U.S.

Supreme Court invalidated certain tariffs imposed under IEEPA, and we filed a claim seeking reimbursement for approximately $7.0 million that we had paid under the invalidated tariffs.

We received payment for the full amount claimed during the first quarter of fiscal 2027.

See Note 14 of the consolidated financial statements for further details.

Working Capital

Operating Working Capital

Operating working capital (accounts receivable and inventories, less deferred revenue, accounts payable-trade, and accounts payable-capital expenditures) was $43.4 million as of April 27, 2025, compared with $38.5 million as of April 28, 2024.

Operating working capital (the total of accounts receivable and inventories, less deferred revenue, less accounts payable-trade, and less accounts payable-capital expenditures) was $41.6 million as of May 3, 2026, compared with $43.4 million as of April 27, 2025.

Operating working capital turnover was 4.9 during the fourth quarter of fiscal 2026, compared with 5.7 during the fourth quarter fiscal 2025.

Accounts Receivable

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 receivable was $20.4 million as of May 3, 2026, a decrease of $1.5 million, or 6.8%, compared with $21.8 million as of April 27, 2025.

This decrease primarily reflects faster payment trends with key bedding customers that had shorter credit terms and utilized more discounts, as well as a substantial payment from a significant customer in the upholstery segment during the fourth quarter of fiscal 2026, which payment did not occur during the fourth quarter of fiscal 2025.

Accordingly, days' sales outstanding decreased to 35 days for the fourth quarter of fiscal 2026, from 40 days for the fourth quarter of fiscal 2025 .

Inventory was $47.5 million as of May 3, 2026, a decrease of $1.8 million, or 3.7%, compared with $49.3 million as of April 27, 2025.

This decrease was primarily due to improved alignment of inventory purchases with current customer demand trends and a strategic focus on reducing aged inventory.

Inventory turns were 3.7 for the fourth quarter of fiscal 2026, as compared with 3.3 for the fourth quarter of fiscal 2025.

Accounts Payable-Trade

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.

Accounts payable - trade was $25.7 million as of May 3, 2026, a decrease of $1.6 million, or 5.8%, compared with $27.3 million as of April 27, 2025.

This trend stems from a decrease in inventory purchases during the fourth quarter of fiscal 2026, as compared with the fourth quarter of 2025, driven by improved alignment of inventory purchases with current customer demand trends, as well as our cost reduction initiatives in connection with our restructuring activities announced on April 24, 2025 (see Note 10 of the consolidated financial statements for further details).

Financing Arrangements, Commitments and Contingencies, and Contractual Obligations

Revolving Credit Agreements

Line of Credit Agreements - Overview

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

parent company and our operations located in China.

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.

We had outstanding borrowings associated with our line of credit agreements totaling $19.1 million as of May 3, 2026, of which $12.1 million and $7.0 million were reported in lines of credit-current and lines of credit-long-term, respectively, in the 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 11 of the consolidated financial statements for further disclosures regarding our line of credit agreements, which includes a Third Amendment to our U.S.

As of May 3, 2026, we were in compliance with these financial covenants.

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

revolving credit agreement effective June 12, 2025.

Revolving Credit Agreement - United States

On June 12, 2025, Culp, Inc., as borrower, and Read and Culp Fabrics Global, LLC, each a wholly-owned domestic subsidiary of the company, as guarantors (collectively, the “Guarantors”), entered into a Third Amendment to the Second Amended and Restated Credit Agreement (the “Third Amendment”), by and among the company, the Guarantors and Wells Fargo Bank, National Association, as lender (the “Lender”).

The Third Amendment amended the Second Amended and Restated Credit Agreement dated as of January 19, 2023, (as amended, restated, supplemented, or otherwise modified from time to time, the “Credit Agreement”), an asset-based revolving credit facility (the “ABL Facility”).

Proceeds from the ABL Facility may be used to pay fees and expenses related to the ABL Facility and to provide funding for ongoing working capital and general corporate purposes.

Pursuant to the Third Amendment, the term of the ABL Facility was extended for three years and matures on June 12, 2028.

The ABL Facility may be used for revolving credit loans and letters of credit from time to time up to a maximum principal amount of $30.0 million, which may be increased upon mutual agreement by up to $10.0 million via an accordion feature, subject to the limitations described below.

The Fourth Amendment to the Second Amended and Restated Credit Agreement, dated November 4, 2025, increased the aggregate amount of letters of credit that could be issued by the company under the ABL Facility from $2.0 million to $3.0 million.

The amount available unde r the ABL Facility is limited by a borrowing base consisting of certain eligible accounts receivable and inventory, reduced by specified reserves, as follows:

• 85% of eligible accounts receivable, plus

• the least of:

i) the sum of:

o lesser of (i) 65% of eligible inventory valued at cost based on a first-in first-out basis (net of intercompany profits) and (ii) 85% of the net-orderly-liquidation value percentage of eligible inventory, plus

o the least of (i) 65% of eligible in-transit inventory valued at cost based on a first-in first-out basis (net of intercompany profits), (ii) 85% of the net-orderly-liquidation value percentage of eligible in-transit inventory, and (iii) $4.0 million, plus

o the lesser of (i) 65% of eligible raw material inventory valued at cost based on a first-in first-out basis (net of intercompany profits) and (ii) 85% of the net-orderly-liquidation value percentage of eligible raw material inventory.

In each case, the net-orderly-liquidation value is calculated based on the lower of (i) a first-in first-out basis and (ii) market value, and is (A) net of intercompany profits, (B) net of write-ups and write-downs in value with respect to currency exchange rates and (C) consistent with most recent appraisals received and acceptable to Lender.

ii) $20.0 million;

iii) An amount equal to 200% of eligible accounts receivable.

• minus applicable reserves.

The ABL Facility permits both base rate borrowings and borrowings that bear interest at annual rate equal to daily simple SOFR (the secured overnight financing rate administered by the Federal Reserve Bank of New York (or its successor)), in each case, plus an Applicable Margin equal to:

(i) 75 basis points for base rate borrowings and 175 basis points for SOFR-based borrowings (if the average monthly excess availability under the ABL Facility is greater than 66 2/3%), (ii) 100 basis points for base rate borrowings and 200 basis points for SOFR-based borrowings (if the average monthly excess availability under the ABL Facility is less than or equal to 66 2/3% and greater than 33 1/3%), or (iii) 125 basis points for base rate borrowings and 225 basis points for SOFR-based borrowings (if the average monthly excess availability under the ABL Facility is less than or equal to 33 1/3%), as applicable, with a fee on unutilized commitments at an annual rate of 37.5 basis points (if usage is equal to or greater than 50% of the maximum credit available under the ABL Facility) or 50 basis points (if usage is less than 50% of the maximum credit available under the ABL Facility).

Outstanding balances associated with the ABL Facility may be prepaid from time to time, in whole or in part, without a prepayment penalty or premium.

In addition, customary mandatory prepayments of the loans under the ABL Facility are required upon the occurrence of certain events including, without limitation, outstanding borrowing exposures exceeding the borrowing base and certain dispositions of assets outside of the ordinary course of business.

Accrued interest is payable monthly in arrears.

The company’s obligations under the ABL Facility (and certain related obligations) are:

(a) guaranteed by the Guarantors and each of the company’s future domestic subsidiaries is required to guarantee the ABL Facility on a senior secured basis (such guarantors and the company, the “Loan Parties”) and (b) secured by all assets of the Loan Parties, subject to certain exceptions.

The liens and other security interests granted by the Loan Parties on the collateral for the benefit of the Lender under the ABL Facility are, subject to certain permitted liens, first-priority.

Cash Dominion.

Under the terms of the ABL Facility, if:

(i) an event of default has occurred or (ii) excess borrowing availability under the ABL Facility (based on the lesser of $30.0 million and the borrowing base) (the "Excess Availability") falls below $6.0 million at such time, the Loan Parties will become subject to cash dominion, which will require prepayment of loans under the ABL Facility with the cash deposited in certain deposit accounts of the Loan Parties, including a concentration account, and will restrict the Loan Parties' ability to transfer cash from their concentration account.

Such cash dominion period shall end when Excess Availability shall be equal to or greater than $6.0 million for a period of 60 consecutive days and no event of default is continuing.

Financial Covenants.

The ABL Facility contains a springing covenant requiring that the company's fixed charge coverage ratio be no less than 1.10 to 1.00 during any period that:

(i) an event of default has occurred or (ii) Excess Availability under the ABL Facility falls

below $4.5 million at such time.

Such compliance period shall end when Excess Availability shall be equal to or greater than $4.5 million for a period of 60 consecutive days and no event of default is continuing.

Affirmative and Restrictive Covenants.

The Credit Agreement governing the ABL Facility contains customary representations and warranties, affirmative and negative covenants (subject, in each case, to exceptions and qualifications) and events of defaults, including covenants that limit the company's ability to, among other things:

• incur additional indebtedness;

• make investments;

• pay dividends and make other restricted payments;

• sell certain assets;

• create liens;

• consolidate, merge, sell or otherwise dispose of all or substantially all of the company's assets;

• enter into transactions with affiliates

The applicable interest rate under the ABL Facility was 5.64% and 5.78% as of May 3, 2026, and April 27, 2025, respectively.

There were $2.8 million, and $925,000 of outstanding letters of credit provided by the ABL Facility as of May 3, 2026, and April 27, 2025, respectively.

As of May 3, 2026, we had $225,000 remaining for the issuance of additional letters of credit, based on an aggregate letters of credit amount not to exceed $3 million as stated in the Credit Agreement.

As of May 3, 2026, and April 27, 2025, the outstanding balances under the Credit Agreement were $7.0 million and $4.6 million, respectively, and were classified as line of credit - long-term within the Consolidated Balance Sheets.

As of May 3, 2026, our available borrowings calculated under the provisions of the Credit Agreement totaled $14.5 million.

Credit Agreements - China Operations

Agricultural Bank of China ("ABC") Agreements

Supplier Financing Arrangements

Based on the company's request, certain suppliers entered into supply chain financing arrangements during fiscal 2026 and 2025.

As a result, we were able to extend our payment terms beyond those that are normal and customary.

The suppliers that entered into these supply chain financing arrangements assigned their receivables due from the company to ABC, under a reverse factoring agreement with no recourse, and, in turn, received payments from ABC under terms that are normal and customary.

Interest was charged at a fixed rate of 2.42% and 2.72% for supply chain arrangements that were entered into during fiscal 2026 and fiscal 2025, respectively.

The outstanding balances of $1.9 million and $2.8 million USD were recorded within lines of credit-current in the Consolidated Balance Sheet as of May 3, 2026 and April 27, 2025, respectively.

The following summarizes the activity associated with our supply chain financing arrangements for the years ended May 3, 2026, and April 27, 2025:

(dollars in thousands)

Outstanding at the beginning of the year

Vendor invoices financed during the year

Vendor invoices paid during the year

Effects of foreign currency

Ending balance

ABC - Working Capital Loans

Executed May 2025

During the first quarter of fiscal 2026, we entered into unsecured loan agreements totaling 21.0 million RMB ($3.1 million USD as of

May 3, 2026), which agreements expired on dates ranging from May 7, 2026, through May 25, 2026 and were paid in full.

Interest charged under these agreements was based on rates determined by ABC (applicable interest rates ranged from 2.5% to 2.6% as of May 3, 2026).

The outstanding balance associated with these agreements was $3.1 million USD and was classified as lines of credit - current within the Consolidated Balance Sheet as of May 3, 2026.

During the first quarter of fiscal 2027, we entered into new unsecured agreements totaling 21.0 million RMB ($3.1 million USD as of borrowing dates ranging from May 21, 2026 through May 26, 2026), and which agreements expire on dates ranging from May 20, 2027, through May 25, 2027.

Currently, interest charged under these agreements is based on an applicable interest rate of 2.3%.

Effective March 2026

Effective March 3, 2026, we entered into an additional unsecured loan agreement totaling 29 million RMB ($4.2 million USD as of May 3, 2026), which agreement is set to expire on March 1, 2027.

Interest charged under this agreement is based on an applicable interest rate of 2.4%.

The outstanding balance under this agreement was $4.2 million USD and was classified as lines of credit - current within the Consolidated Balance Sheet as of May 3, 2026.

Unsecured Credit Agreement

Effective March 5, 2025, we entered into an unsecured credit agreement that provided for a line of credit up to 29.0 million RMB ($4.0 million USD on March 5, 2025) that expired and was paid in full on March 3, 2026.

Interest charged under this agreement was based on an applicable interest rate of 2.6%.

This agreement did not have an outstanding balance as of May 3, 2026, and had a balance of $4.0 million as of April 27, 2025, which was classified within lines of credit-current in the respective Consolidated Balance Sheet.

Bank of China ("BOC") - Credit Agreements

Effective November 5, 2024, we entered into a credit agreement that provided for a 10.0 million RMB ($1.4 million USD as of November 5, 2024) unsecured working capital loan and 25.0 million RMB ($3.5 million USD as of November 5, 2024) for letters of credit, guarantees, and other financing arrangements secured by trade accounts receivable associated with the company’s operations located in China.

The working capital loan and letters of credit expired on November 6, 2025.

Interest charged under this agreement was 2.6%.

On November 6, 2025, (third quarter of fiscal 2026), we paid in full the outstanding balance of the 10.0 million RMB ($1.4 million USD) due pursuant to the above unsecured working capital loan.

Effective November 7, 2025, we entered into a new credit agreement that provides for a 10.0 million RMB ($1.5 million USD as of May 3, 2026) unsecured working capital loan and 25.0 million RMB ($3.7 million USD as of May 3, 2026) for letters of credit, guarantees, and other financing arrangements secured by trade accounts receivable associated with the company’s operations located in China.

The working capital loan and letters of credit expire on November 11, 2026.

Interest is charged based on a fixed rate of 2.5%.

The outstanding balance under these agreements was $1.5 million and $1.4 million USD and were classified as lines of credit-current within the Consolidated Balance Sheets as of May 3, 2026 and April 27, 2025, respectively.

In addition, as of May 3, 2026, there were no outstanding letters of credit under this agreement.

China Construction Bank Corporation ("CCB") - Credit Agreement

During the third quarter of fiscal 2026, CCB approved total borrowings of 30.0 million RMB ($4.4 million USD as of May 3, 2026), which includes 20.0 million RMB ($2.9 million USD as of May 3, 2026) that can be used in the form of a working capital loan and supplier financing agreements, as well as a 10.0 million RMB ($1.5 million USD as of May 3, 2026) for letters of credit.

Effective March 17, 2026, we borrowed 10.0 million RMB ($1.4 million USD as of March 17, 2026), which borrowing incurs interest based on a fixed rate of 2.3%, with the balance due on March 16, 2027.

The outstanding balance under this agreement was $1.5 million as of May 3, 2026, which was classified as lines of credit - current within the Consolidated Balance Sheet.

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

Capital Expenditures

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.

As of May 3, 2026, and April 27, 2025, we had total amounts due regarding capital expenditures totaling $236,000 and $23,000, respectively, which pertained to outstanding vendor invoices, none of which were financed.

As of May 3, 2026, we had open purchase commitments to acquire equipment for our bedding operations totaling $352,000.

Uncertain Income Tax Positions

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.

As of May 3, 2026, we had $983,000 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 and Depreciation Expense

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

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.

Capital expenditures on a cash basis totaled $596,000 for fiscal 2026 and $2.9 million for fiscal 2025.

Our decision to reduce our level of capital expenditures is due to the current unfavorable macroeconomic conditions within the home furnishings and bedding industries.

During fiscal 2026, we reported depreciation expense of $4.1 million, compared with $5.4 million for the same period a year ago, which was mostly related to our bedding segment for both periods.

In addition, during fiscal 2026 we reported accelerated depreciation of $112,000 that was classified within restructuring credit in the fiscal 2026 Consolidated Statement of Net loss.

The $112,000 of accelerated depreciation related to the shortening of useful lives of equipment associated with the consolidation of distribution activities from our Burlington, North Carolina, facility to our manufacturing and distribution center located in Stokesdale, North Carolina.

Furthermore, during fiscal 2025, we reported accelerated depreciation of $1.3 million that was classified within restructuring expense in the fiscal 2025 Consolidated Statement of Net Loss.

This $1.3 million of accelerated depreciation related to the shortening of useful lives of equipment associated with the closure of our operations located in Quebec, Canada.

See Note 10 of the consolidated financial statements for further details and descriptions of our restructuring activities announced on May 1, 2024 and April 24, 2025.

The level of capital spending for fiscal 2027 will be determined based on the current macroeconomic conditions associated with the home furnishings and bedding industries.

We currently expect capital spending for fiscal 2027 to be in line with fiscal 2026, and will center on capital projects that increase efficiencies, improve the quality of our products, and facilitate future growth.

Funding for capital expenditures is expected to be from cash provided primarily by operating activities and, as needed, availability under our lines of credit.

Handling Costs

We record warehousing costs in SG&A expenses.

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

Handling costs were $4.2 million and $4.6 million during fiscal 2026 and fiscal 2025, respectively.

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.

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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.

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, as well as rising oil prices beginning in the fourth quarter of fiscal 2026, have influenced industry pricing structures and supply chain patterns.

These evolving conditions are expected to continue placing 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.

In recent periods, we implemented price increases designed to mitigate the impacts of recent tariff actions affecting products imported into the U.S., including those imported from China, as well as additional surcharges in response to new tariffs on imports from Haiti, Turkey, and elsewhere.

The majority of these price increases began to phase in and become effective as of the second quarter of fiscal 2026, and we believe that our current pricing strategies position us to effectively absorb the additional costs flowing from applicable tariffs.

However, the above-referenced dynamics may ultimately lead to higher input costs, with potential adverse implications for our financial performance.

Additionally, we implemented price increases designed to mitigate the impacts of rising oil and other petrochemical costs during the fourth quarter of fiscal 2026.

However, ongoing conflicts in the Middle East and other factors may lead to additional costs arising from

increases in oil and other petrochemical prices, which may harm our results of operations if we are unable to pass along such additional costs.

Finally, persistent inflationary pressures significantly curtailed consumer spending during fiscal 2023, with effects extending through fiscal 2026.

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 bedding and residential upholstery 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.

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Due to the uncertain and unpredictable nature of our estimates, actual results could differ from the estimates that were previously reported in our consolidated financial statements.

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.

As of May 3, 2026, 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.

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

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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 of May 3, 2026, we assessed the percentages associated with the age of our inventory and the related aging categories.

Based on this assessment, we determined that no changes to our percentages associated with the age of our inventory and the related aging categories were necessary.

During the fourth quarter of fiscal 2025, we performed an assessment 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.

This $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 charge of $2.1 million and a non-cash inventory credit of $(2.4) million, respectively, within the fiscal 2026 and fiscal 2025 Consolidated Statements of Net Loss.

As of May 3, 2026, and April 27, 2025, the reserve for inventory markdowns was $8.0 million and $7.8 million, respectively.

Income Taxes – Valuation Allowance

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Our judgments are often based on estimates that are derived from (i) forecasted financial information, (ii) assumptions on when certain taxable or deductible events will occur, and (iii) interpretation of complex income tax laws and regulations.

As of April 27, 2025, we recorded a full valuation allowance against all our U.S.

As of May 3, 2026, we recorded a full valuation allowance against all our U.S.

net deferred income tax assets totaling $28.7 million.

Refer to Note 12 of the consolidated financial statements for additional disclosures regarding our assessments and conclusions reached regarding our valuation allowance as of April 27, 2025.

Refer to Note 12 of the consolidated financial statements for additional disclosures regarding our assessments and conclusions reached regarding our valuation allowance as of May 3, 2026.

Stock-Based Compensation

We are required to recognize compensation expense for all stock-based compensation awards in the financial statements, with the cost measured at the grant date fair value.

We are required to recognize compensation expense based on the fair value on the date the respective stock award is granted.

Compensation expense for performance-based restricted stock units is recognized based on an assessment each reporting period of the probability of whether or not certain performance targets will be met and how many shares are expected to be earned as of the end of the vesting period.

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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.

During fiscal 2026, the company granted performance-based restricted stock units that did not have any market conditions (i.e., no TSR moderator).

During fiscal 2025, the company granted performance-based restricted units that had a market condition (i.e., a TSR moderator), and accordingly, we estimated the fair value of such performance-based restricted stock units 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 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.

The determination of these inputs, 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 $625,000 and $650,000 of compensation expense within selling, general, and administrative expense for our equity-based awards in fiscal 2026 and 2025, respectively.

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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